Best Financial Markets Analysis Article My outlook for the economy and the stock market has steadily and significantly deteriorated since March 2010. That’s when monetary indicators started to signal renewed emerging stress in the financial system, and leading economic indicators started heading south.

The stock market was richly valued in terms of dividend yield and price/earnings ratios. And I predicted a topping formation followed by a new bear market. Since then the market has moved nowhere.

Price movement since last October looks like a well-formed topping formation. Longer term trend-following instruments like the 200-day moving average have turned sideways, thus confirming the topping process.

The Stock Market Is on the Verge of a Break Down

The most likely scenario now is a breakout below the lower boundaries of this topping formation — below the 1,010 level the S&P 500 reached on July 1. Such a move would definitely make clear that April’s high was THE high for the huge bear market rally that started in March 2009.

chart1 The Bond Market Is Signaling Trouble Ahead

This bear market rally was indeed a huge affair. But still not out of the realms of former bear market rallies, which are mostly forgotten today. A prime example is the rally following the 1929 crash …

Stock prices rose more than 50 percent, and contemporary economists declared the crisis over. But the crash was only the prelude to the devastating bear market that got going after the bear market rally of early 1930.

The Bond Market Confirms This Bearish View

Both the bond market and the stock market are to some degree leading indicators. But the bond market is said to be the smarter one because bond traders are generally more vigilant in looking for trends in the economy.

Already the bond market is conveying an important economic message …

As you can see on the chart below, the 10-year Treasury bond yield has dramatically declined since early April. In fact, 10-year yields are as low as in December 2008, during the depth of a severe economic and financial crisis.

chart2 The Bond Market Is Signaling Trouble Ahead

This pronounced slump in yields is sending a frightening message: It’s anticipating a recessionary economy.

That message fits perfectly with other leading economic indicators and with my own big-picture economic model showing that the economy is again on its way into a recession. And the picture is getting clearer by the day.

As I’ve said in past Money and Markets columns, every recession in history has been accompanied by a severe bear market …

And I wouldn’t be surprised if the March 2009 lows were broken at some point during the next two years.

Best wishes,

Claus

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Comments

Chris Smith
18 Aug 10, 13:11

Recessions
<> Definitely NOT true. Off the top of my head I can think back to the recession in the early 1990's. The "bear market" lasted 3 months from mid July to mid October of 1991. The S&P dropped from 370 to 295. You might "bicker" about a 20% drop....but to me, that is definitely NOT a "significant bear market." Let's face it....3 months!! I think we are likely to do about the same thing. We will head lower into late October/early November...and then head back up....likely hitting S&P 900ish at the trough. Chris Smith

Justin
19 Aug 10, 00:18

bear market

"The stock market was richly valued in terms of dividend yield and price/earnings ratios. And I predicted a topping formation followed by a new bear market. Since then the market has moved nowhere. "

Claus you fail to mention that youve been calling for the bear market to resume for about a year, not just recently.

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