"Please fasten your seatbelts and make sure your tray tables are stored in the upright position. This is your captain speaking and I regret to inform you that we could start experiencing some turbulence. Please try to stay in your seats but take a moment to locate the nearest exit door." Many of us have experienced a bumpy plane ride before and it makes a great analogy for where the market could be headed. The S&P 500 is flying high up 60% off its lows and now it's struggling to gain altitude with resistance near 1,110 and some long-term trendlines directly overhead.

Fund managers working on a calendar year could be nervous about protecting gains, their bonus, and possibly their jobs as they face the last few weeks of the year. I mentioned last week how money was flooding into short-term treasury bonds with almost no yield because it was a "safe" place to put your money. The trend of looking for safe havens could continue now that investors are once again facing a potential sovereign default with Dubai World in trouble. Analysts are worried that Dubai could have a domino effect and we end up facing another crisis like the Russian meltdown in the 1990s or the Argentina fiasco in the early 2000s.

I'm not going to spend a lot of time discussing the Dubai World news and the potential disaster. While Dubai's liabilities are estimated in the $60-90 billion range odds are good that there will be a bailout and nerves will calm down before the market opens on Monday. The selling pressure in the U.S. wasn't that bad. A 2% pull back in the S&P 500 after closing near its 2009 highs is nothing. Some of the Chinese markets dropped 5% and Europe, which holds most of the Dubai debt, only fell 3% although some of the banks fell a lot more.

Don't get me wrong here. I'm not saying ignore the Dubai news but it's just one factor in a storm of bearish headwinds that thus far the U.S. stock market has been able to ignore. You already know that I'm concerned the U.S. economy will see a double-dip recession probably happening in the second half of 2010. Unemployment is going to continue to inch higher and the foreclosure plague still has a couple of more years before it finally runs its course. I'd like to be more optimistic but rising U.S. debts and deficits (and probably taxes) are not a solution to fixing our problems. We're facing risk of falling into deflation or steep inflation if we're not careful. Japan has already fallen back into deflation. The plunging U.S. dollar may help the U.S. government but it doesn't help the U.S. consumer. Meanwhile there has been no uptick in business inventories. Although I'm hopeful that this holiday season will benefit from pent up demand and easy comparisons to last year's horrible holiday shopping results. Any gains in the retailers could end up being temporary.

Last week's initial jobless claims looked good at first glance with a drop to 466,000 new claims. Yet that's the seasonally adjusted number. Unadjusted claims were 543,900 new workers seeking unemployment. Next week could be crucial to keeping this rally alive. If the ISM report comes in strong and the non-farm payroll data due out on Friday is better than expected then this market could surge to new highs. Maybe 1200 or 1250 on the S&P 500 is not out of reach. Just the opposite could happen if these reports disappoint. Stocks are arguably overbought. A normal 38.2% retracement in the S&P 500 would bring us down to the 950 level. It would not surprise me at all to see the market holding its breath until these economic numbers are announced.

In summary this is not a buy and hold market. As LEAPS option traders we have to be very careful when it comes to our entry point and right now, with the market looking vulnerable, it is not a very enticing market to launch new positions. We're looking for investments we can hold for 6 to 18 months. With that in mind what do you buy if the economy is likely to bounce for another quarter or two and then roll over? It's too early for long-term bearish trades. Investors will probably do well to take a short-term perspective on their investments as conditions are likely to change. Said another way the market could see some turbulence and readers will want to double check where their stop losses (exit doors) are located on any current investments.

Short-term I would turn bearish if the S&P 500 falls under the 1,080 level. If that level breaks we'll probably see a drop toward the early November lows around 1,030. You can see on the chart below that a normal Fibonacci retracement of 38.2% would pull the S&P 500 down toward the 950 level. Right now I'm more concerned about the small caps, which continue to underperform and have created a new trend of lower highs and lower lows.

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

2nd Weekly Chart of the S&P 500 Index:

Chart of the Russell 2000 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 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several 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 and 2011. 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