This past week, some reality set in on a global level that especially the U.S. economy is not all it was cracked up to be. Of course, to readers of this blog, this should come as no surprise as I have repeatedly pointed out that the alleged economic recovery has been simply a mirage supported by reckless government stimulus programs.

It defies common sense and logic to assume that artificially created demand can be anything but ephemeral. Short of invoking Stimulus 2.0, we have reached the moment of truth where the real economy needs to stand up and be recognized.

To my way of thinking, this recognition will be in form of utter disappointment during the second half of this year, as GDP numbers are sure to disappoint. When even the #1 cheerleader, Fed chief Bernanke, talks in the most optimistic language that things are “unusually uncertain,” it should serve as a wake-up call that reality may be somewhat different than what was being assumed.

Take a look at what Harry Dent has to say on the subject. His view of the economy matches mine and is spot on. Where I am not as sure is on the numbers he presents as to where the stock market may end up. Hat tip goes to reader Larry for sending in this link to Harry’s July video:

http://www.hsdent.com/july2010update/

If the scenario of a lower stock market comes to pass, bonds/bond funds will continue to be the investment of choice. Eventually, once bear market territory has been entered, and the domestic TTI (Trend Tracking Index) has been broken, some short positions via the major indexes will be a definite possibility.

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

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

Weak economic news handed the bears a victory with the major indexes dropping sharply.

Our Trend Tracking Index (TTI) for domestic funds/ETFs held above its trend line (red) by +2.30% (last week +3.48%) and remains in bullish mode.

The international index has now broken barely below its long-term trend line by -0.17% (last week +3.10%). A new Buy Signal was triggered 7/23/10 with the effective date being 7/26/10. Be sure to use my recommended 7% trailing sell stop discipline, should you decide to participate in this new uptrend. An outright sell signal will be issued once the trend line gets pierced by -1.00%.

Reality about a slowing economy not only hit Wall Street yesterday but also dragged global markets down as no region proved to be a safe haven from the selloff. Bonds were the beneficiary again as interest rates headed lower.

I was not about to wait around to see if that debacle would turn into a 500 point down day, so I sold some of our recently acquired country ETFs. Our international fund, which initially raced higher after we purchased it, headed sharply lower and actually dropped below its own respective long-term trend line. Barring a sharp reversal today, this fund will be sold as well.

While all global markets were affected, the damage was far greater internationally than domestically. This was reflected in the sharp drop of our international Trend Tracking Index (TTI), which moved to within +0.09% of generating a sell signal. Its domestic cousin is still hovering above its own trend line by +2.89%.

Contributing to the market’s sudden demise were continued worries that the global economy will be heading in the wrong direction. Not helping matters was a 19% increase in the June U.S. trade deficit, which will result in a downward revision of the second quarter economic growth figures.

Additionally, after a night of thinking about Tuesday’s Fed move, it became clear that, while they are concerned about a slowdown, their intentions might be too little to right the sinking ship.

It seems like the markets have been moving in a vacuum for most of this year with no sustainable long-term trend in place; either up or down. The result has been whipsaw sideways action where neither the long nor the short side has produced any meaningful results.

Yesterday’s pullback violated some important technical levels. First, the S&P; 500 plunged below its all important 200-day moving average (1,115). Second, it has also moved to within shouting distance of breaking its 50-day moving average (1,081) which, if broken, could invite some serious selling.

The bottom-line is that we’re back to a level within the range where anything is possible. You could see another sharp move up, but given the economic backdrop, it’s questionable whether there will be any staying power.

The reality of globally slowing economies finally seems to have made its way to the stock exchanges of the world. Short of any incredibly good news to the contrary, it’s my opinion that over the next few months the path of least resistance will be to the downside.

Even though yesterday’s closing prices did not reflect the intra-day activity, it was a wild day nevertheless. The chart above (courtesy of freestockcharts.com) represents Tuesday’s 5-minute interval moves of SPY.

It was waiting time until the Fed announcement, which occurred as indicated via the red arrow. Prior to that, the markets were down, then shot straight up and whip-sawed the remainder of the session but cut the losses for the day in half.

The Fed threw the market a bone by announcing that it was willing to expand its holdings of government debt thereby insuring that there are adequate supplies of cash in the economy.

The bone did not have much meat on it, which explains the continued uncertainty after the announcement displayed by the erratic market behavior in the chart.

Going this route is an admission, at least to my way of thinking, that economic conditions could worsen and that the Fed is willing to deploy any tool it has available. I am not an economist but, historically, none of the past actions have resulted in any long-term benefit and have proven to be of questionable duration and effect.

Nevertheless, if the markets decide to interpret this as a positive event by continuing to rally, I will not question this upward tendency and stay aboard until the trend comes to an end and our trailing sell stops issue the signal to step aside.

These are very difficult market conditions because not only does the Fed seem confused as to which next step to take, it also is slipping into unchartered territory with its decisions.

The markets meandered on low volume yesterday, however, with a positive bias, and we ended up closing about ½% higher.

The Fed watch is on; not as much in regards to the question as to whether higher interest rates are on the horizon, but more importantly if they will come up with any grand ideas to improve the sagging economy.

The bond market with its continuous rally and ever decreasing yields is as good of an indicator as you can find confirming that the economy is anything but robust. If the opposite were the case, we’d have higher yields and a falling bond market.

Nothing will surprise me as to what the Fed will throw at the markets next. Be prepared to deal with a relief rally, bitter disappointment, or anything in between.

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Disclosure: No affiliation with MarketRiders