With the 50 day exponential moving average at 895 and the market already oversold by many measures, the downside appears to be limited right here. But sometimes appearances can be misleading.

To the bulls credit, the small cap Russell index and the Nasdaq have been showing relative strength compared to the overall market. However, there appears to be some bearish divergences as higher highs have been accompanied by loss of momentum.

What this means is that if the market breaks down, the Russell and Tech may play catchup, so be aware. A lot of hot money has gravitated to those sectors since the March lows. If it gets chased out it'll get ugly in a hurry.

These markets, to me, have become nothing more than momentum plays. Exhibit #1 would be gas futures rising 50 days IN A ROW!
There is nothing fundamental about that. It's simply momentum. I've seen it before and I know how it ends....badly.

Anyone who thinks the economy is on a V-shaped recovery needs to read the FedEx earnings report. REVENUE down 20%! Not earnings...REVENUE! They basically see no turnaround anytime soon.

Outside of taxpayer funded banks, the real economy is still contracting and adjusting to a new reality. Pimco calls it the "new normal". I call it deflation, and although it's not new, it is true it hasn't been around in a while.

Asset prices should continue to adjust to this "new" environment, and the adjustment ain't up!

If I'm right there'll be another wave of liquidation of assets as people and institutions scramble to pay off what they already owe. Forget borrowing more.

It's this "contraction of credit" which is at the center of this financial calamity for the ages. Until that runs it's course, nothing else really matters.

I know, I know, the government is expanding credit to offset the private credit contraction. Well if you want to see the effect THAT'S going to have, just watch Goldman Sachs and JP Morgan's bonuses this year after paying the TARP money back. That's about the only place you'll see it show up.