Indiana Jones And The Search For The Market Bottom

You don't have to be a world class archaeologist to figure out what's going on in the Dow this week. Earlier I warned that the Dow would indeed test the 8,000 mark again, and it did at the end of yesterday's session falling to just under the 8k level.

With an entire night to digest the numbers, Dow futures are having another meh day. It could go either direction, and this may actually be a vitally important day in the markets. If the Dow rallies once again or stays around the opening level then it's another sign the 8k level is the bottom for now. There's evidence that the market really wants to stay above 8,000. News this morning that Saudi prince Alwaleed Bin Talal Alsaud increased his stake in Citigroup to a full five percent of the company may be the rally point for today.

If it sinks big time however like yesterday, then all bets are off.

Plenty of evidence is there on the latter. The Fed is starting to see evidence that deflation may be the threat, not inflation.

Five years after Federal Reserve Chairman Ben S. Bernanke helped stamp out the risk of deflation, the threat is returning as the financial crisis and a worsening economic slump pull inflation lower.

Fed policy makers now predict the U.S. economy will contract until the middle of next year, according to minutes of their Oct. 28-29 meeting released yesterday in Washington. Government figures showed that consumer prices excluding food and fuel costs fell for the first time since 1982 last month.

The minutes, along with a slide in financial stocks to the lowest level in 13 years, increased the odds that the Fed will cut its benchmark interest rate next month. Bernanke may also need to revisit the unorthodox policy options, such as purchases of U.S. government debt, that he outlined as a board member in 2002-2003, Fed watchers said.

``The Federal Reserve put deflation back on the table as a significant policy concern,'' said Vincent Reinhart, former director of the Fed's Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington. ``There does not appear to be any barrier to lowering'' main rate below the current 1 percent level, he said.

Deflation, or prolonged declines in prices, hurt the economy by making debts harder to pay off and lenders more reluctant to extend credit. Japan is the only major economy to have suffered the phenomenon in modern times.

Things could go either way, short term. Long term however keep in mind things will get worse...much worse. We're getting closer and closer to the "Stagpression" scenario, a multi-year period of recessionary contraction that will cycle around the globe.