Challenges Ahead

The Dow managed to avoid another triple-digit sell-off today, but hardly looked like a pillar of strength. The major benchmarks are sitting on critical long-term support, and a breakdown from here would be highly bearish. On the other hand, many indicators point to short-term oversold conditions. A short-term bounce in the next few days will not be surprising. Even so, it remains difficult to build a bullish technical case for this market.

Signs of recession continue to mount. The national jobless rate was 5% in December, the highest in two years. Martin Feldstein, a Harvard economist and president of the National Bureau of Economic Research, now places the odds of recession at "more than 50%." Top economists are projecting the U.S. will show 1% growth in the 4Q, according to a survey by Bloomberg News.

Not coincidentally, interest rate futures now suggest a 70% chance the Fed will cut rates by a half-point at the next policy meeting on January 30th. That would bring overnight rates down to 3.75% but long-term rates for non-governmental debt are still stubbornly high. Hence there is little reason to expect the Fed will rescue the economy. It is out of their hands, at least in the short-term.

The brief frenzy in energy last week has dissipated somewhat, with crude oil dropping today based on economic weakness. Even so, energy sector funds still dominate the top of our intermediate-term momentum rankings, along with gold. The combined strength of these two sectors is a sign that the real driving force is weakness in the U.S. dollar.