Stocks suffered another weekly decline after a parade of disappointing economic data. It wasn't just one or two reports either. Almost every piece of economic news that investors were hoping would reinforce the bullish view for the recovery failed. The only good news was GDP and pending home sales. The last look at Q2 GDP came in at -0.7% when economists were expecting a revision from -1.0% to -1.1%. Pending home sales came in a lot higher than expected but the markets shrugged it off. August is typically the peak for the summer (and yearly) selling season and this year there was a rush to sign contracts so buyers would have time to close before the $8,000 tax credit expires at the end of October. This real estate news was apparently "baked in".

What was not expected were all the disappointments. The Conference Board's consumer confidence numbers fell from 54.5 in August to 53.1 in September. Analysts were expecting a rise to 57.0. The Chicago PMI missed estimates. The National ISM number was a disappointment. The ADP employment report was worse than expected. Weekly initial jobless claims were higher than expected. The non-farm payrolls report was worse than expected. Economists were estimating the U.S. lost 180,000 jobs in September. The jobs report showed a loss of 263,000 and they revised August losses even higher. Factory orders fell. Mortgage applications fell even though mortgage rates are approaching their all-time lows. It was not a good week for the bulls. Yet the sell-off in stocks was not panicked.

Last week I told investors to watch for potential support at 1,040 and 1,020. The S&P 500 bounced at both levels. The biggest concern I see right now was the volume. Volume was huge for the down days, which is normally a bearish signal. We were expecting a pull back and now we got one with the S&P 500 down about 5% from its September highs. The question is does our theory about money managers chasing performance still hold up? September was the end of the third quarter but October is the end of the fiscal year for many mutual funds and hedge funds. Anyone who was under invested during the market's rally since March is looking to buy stocks on a pull back. On the other hand money managers could also be looking to lock in gains if they're worried stocks have actually reversed. It's a good, old-fashioned tug-of-war between the bulls and the bears.

My bias for the rest of 2009 remains bullish but the outlook for the next two or three weeks is murky. The tone of the market could be changing thanks to last week's round of disappointing economic data. Suddenly the strength of the economic rebound is in doubt. A lot of market participants have been betting on a strong "V" shaped recovery. Readers know that I believe we'll see a "W" shaped recovery but I wasn't expecting us to hit the middle of the "W" until late 2009-early 2010. The next big market driver is going to be earnings and earnings season will be here in another week or so. If the general trend of earnings is better than expected or if management's guidance comes across as more bullish then the rally should take off again. If there are too many high-profile earnings misses and management is still too cautious or downright bearish then stocks may continue to correct. Our fate will be decided in the next couple of weeks. Alcoa (AA) typically kicks off earnings season and they report on October 7th. The bulk of earnings don't really start until the following week. Then it turns into a flood of earnings starting the 19th of October.

Next week's economic calendar is pretty light and with the bulks of earnings still more than a week away the short-term downtrend may continue. Here's what I'm watching. Keep an eye on the Dow Jones Transportation index, which should find some support in the 3600-3500 zone. The SOX semiconductor index could find support in the 300-285 zone. I would definitely watch the banking indices. If these breakdown under their September lows it could portend a deeper correction is upon us. The S&P 500 is currently testing its 50-dma. If the pull back continues I would be surprised if it broke the 1,000 level and I would be worried if it closed under the early September lows near 990.

Chart of the Transportation Index:

Chart of the BKX banking Index:

Chart of the BIX banking Index:

Chart of the S&P 500 Index:


Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010. Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. A few weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown