There is still plenty of optimism in the stock market which will propel stocks lower in the coming months. As the optimists are slowly and painfully converted into pessimists, or realists if you prefer, it will intensify the selling momentum. Stocks are simply too expensive at current levels despite the sharp pullback. In fact, the stock market feels as if it is being desperately kept afloat while many other markets are pricing in a double dip recession. Crude oil has fallen from around $83 a barrel to $71.60 in a matter of weeks. The yield on 10-Year Treasuries has plummeted to an unbelievably low 2.47%. This has occurred incredibly fast as the dire economic situation has been priced in by the bond market. The Japanese Yen, a traditional safe-haven currency, is now trading near record highs in the FX market. The ECRI index is plunging along with a host of other leading indicators. GDP estimates are being slashed furiously on Wall Street. The housing situation is getting worse along with the outlook for the jobs market. Yet, here we are still trading around the 10,000 level on the Dow Jones Industrial Average. The pundits continue to call the rush to safety a "bond bubble," and insist that now is the time to buy stocks. We hear that the recent pick up in M&A will be a catalyst, but so far it has coincided with an extended sell off in the indices. "Valuations are cheap," they exclaim. Bill Miller, a legendary Legg Mason fund manager, said not too long ago that he sees tremendous value in large caps at current levels. Miller, however, was crushed during the financial crisis as he focused on fundamentals and price levels as opposed to price action. You need to watch the price action, which suggests that buying at these levels may be tantamount to stepping in front of an oncoming locomotive. Pull up a chart of the S&P and take a look at the giant head and shoulders pattern that preceded the latest round of selling. Or how about the cluster of Hindenburg Omens that have been triggered in the last couple of weeks. You don't have to be a believer in this ominous technical indicator, but do you really want to risk it? Furthermore, what is the catalyst going to be for a sustainable move higher? I don't see much of anything on the horizon, but I do see a plethora of possible downside triggers. 1. Anymore slowing growth whispers out of China will be a disaster 2. A re-flaring of the Eurozone sovereign debt crisis looks imminent. Ireland was downgraded yesterday, and the Euro is headed back down. 3. The economic outlook in the United States will likely continue to deteriorate 4. A geo-political event - which could be sparked as tensions between Iran and Israel continue to escalate 5. A breakdown in the capital market structure under stressed conditions like we saw during the May 6 "Flash Crash" After the stock market crash of 1929 there was a tremendous rally off of the bottom, but stocks did not reach their low point until 1932. A number of very smart investors have drawn parallels between that period in time and today. The rally that we had off of the March lows was driven by liquidity, which is now disappearing at an alarming rate. What happens to an economy when the housing market is in a depression, unemployment levels are incredibly high and going up, there is a sharp contraction in credit, and psychology is eroding by the day? What do you think happens to that economy's stock market? Put two and two together and protect your assets while you still can.Get real-time news and stock alerts by following Benzinga on Twitter!
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