Questions about slowing economic growth along with profit-taking pulled the markets off their lofty levels yesterday. After the euphoric run up in September, the fundamentals will now have to play catch up via earnings and other reports.

One fly in the ointment was that analysts cut back their earnings forecasts for the S&P; 500 index, which has not happened in over a year. How much of a drag that will be on stock prices remains to be seen until the hard numbers come out.

The non-manufacturing index today can very well accelerate the current trend reversal or provide a floor until the all important jobs report on Friday will make its presence felt.

While the markets have been showing weakness during the past week, a B of A analyst expects stocks to fall sharply this month with a decline of as much as 10% to 12% from these levels. Again, this is just one opinion, and forecasts like that can be as accurate as the ones issued for the weather.

Nevertheless, markets do not go straight up forever, and a correction is overdue. To what extent it will happen is everyone’s guess. Be prepared by having your stop loss points in full view and execute when necessary. The time to get your exit strategy in order is now, and not when the market heat is on.

If you are in need for some arguments as to why the markets will move higher, take a look at “Get ready for an epic bull market:”

Investors are scared. Workers are worried. And pessimism reigns. Yet in one market, a boom is under way.

It gets better: Strategists like Levkovich, who use economic data and historical relationships to make “top-down” estimates, are less optimistic than “bottom-up” stock analysts who examine individual companies. The bottom-up consensus 2011 S&P; 500 earnings per share estimate stands at $96. Putting a 22-times multiple on that estimate would push the S&P; 500 all the way to 2,112, for a gain of 85%.

There you have it; a forecast about as optimistic as only a model can produce. I would not bank on any of these numbers to come true; after all it’s just one man’s prediction. My preference is to stick to reality and let actual market trends tell me where we might be going.

The underlying fundamentals are closer to support the view of potential economic weakness ahead, as the Fed has readied itself to stand by via QE-2 to lend a helping hand should more trouble arise.

That, among many other issues, leads me to believe that we are not (yet) in an environment that easily can set the stage for an epic bull market as the article claims.

While I am not much of a movie buff, my wife and I did go out last week and saw “Wall Street.” I like actor Michael Douglas and, as anticipated, he played his role to perfection.

While the story line was well done, personally I was hoping for a little more insight about the 2008 market crash. Details never emerged, but the failing and surviving brokerage companies were clearly recognizable.

The speech that Gordon Gekko (Michael Douglas) gave in front of a graduating class was right on the money including his reference to the students being from then NINJA generation. No Income, No Job and No Assets. Sad but true.

MarketWatch featured an article about the movie in “Wall Street the movie frightens Main Street.” Not much struck my cord in it, except the final paragraph:

Greed is good, and so is fear. Investors who keep both in moderation — and have a strategy that doesn’t give in to either of those two extremes — will find out that while their money never sleeps, it doesn’t have to beat everyone else to win the game.

The movie gives a wrong impression in that viewers may assume that money can only be made by taking huge risks and taking advantage of everybody else in the process. That maybe true for those who consider a $50 million profit not worth the effort, but it represents only a small portion of those caught up in reckless greed.

On the other hand, even average mom and pop investors have now leveraged ETFs available, which they can buy and sell at push of a button to satisfy their need for enhanced profits, which easily can turn into enhanced losses.

Balancing the ever present internal forces of greed and fear is truly an art form. The old Wall Street adage “bulls make money, bears make money, but pigs get slaughtered” still holds as true as ever.

Not making emotional decisions, staying with the long term trend, not getting too overexposed and above all, only invest after determining your risk tolerance (to avoid sleepless nights), are some of the basic fundamentals that will make investing a lot less stressful.

When you combine these simple ideas with a solid exit strategy, that will keep your portfolio from getting a serious haircut, you will come out ahead in the long term and should have no reason to worry about dealing with the vagaries of Wall Street. Having such a plan in place, even though it may not be perfect, is far better than having no plan at all.

Looking at chart patterns can sometimes help identify future market direction. While this obviously is not a perfect science, or a guarantee in any way that things should work out as a pattern indicates, I have seen remarkable consistency with some of them over the past 25 years.

In previous posts, I have referred to some forecasters who include chart patterns in their analysis to view the big picture. One of those patterns that the S&P; 500 is currently generating is a huge head-and-shoulders (H&S;) formation. If you’re not familiar with it, here’s what the picture looks like:



This is a weekly chart, and the head and both shoulders are clearly defined. The theory is that if prices decline from the right shoulder, and break through the neckline (indicated by the red slanting line), that would complete the pattern and lead to lower prices.

The neckline resides currently in the 1,030 area, which means a 10% drop from current prices would get us to that level. With the markets having run up since Labor Day on hopeful economic assumptions, a slide back down could happen in a hurry, should these assumptions be met with disappointment.

Conversely, if prices rally from the top of the right shoulder and end up rising above the high point the “Head” has made (April 2010), all bets are off, and the bullish trend is likely to continue.

While chart patterns such as this one are not an integral part of trend tracking, I use them occasionally to see if I can get a heads-up on future market direction.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

It was a non-directional week, and the major indexes lost slightly.

Our Trend Tracking Index (TTI) for domestic funds/ETFs held above its trend line (red) by +5.78% (last week +5.27%) and remains in bullish mode.



The international index broke back above its long-term trend line by +5.43% (last week +5.57%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.



[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

Several bullish attempts to break through last Friday’s close of 1,148 were rebuffed yesterday during a seesaw trading session. It may very well be an indication that upward momentum is either slowing or that this “Labor Day rally” is coming to an end.

Of course, these days you can never be sure as the markets seem to ignore bad news and see only positives in this economic wonderland. I am not sure if the fact that the Fed has announced that QE-2 (Quantitative Easing) is lurking in the background, and will be activated should the need arise, may be sufficient to keep any downside slide limited in scope.

As the above chart by MarketWatch.com shows, last hour buying kept the losses manageable, a phenomenon we have witnessed quite frequently lately. Continuing its relentless upward march was gold, which again hit a new closing high of $1,310. The dollar slipped and interest rates were lower.

Now that it appears that the markets have finally conquered the bad omen of the month of September, barring of course any unexpected events on the last trading day, we are now facing October, which has a similar evil historical record as a bull market killer.

I doubt that the bulls will be able to pull another rabbit out of the hat; however, only time will tell whether this month’s rebound off the lows still has legs. Watch for any trend reversals and be sure to track your trailing sell stops.