Risk Level:  6

Summary:  Buyers' conviction in pushing prices higher seems to be ebbing a bit, as stocks weren't able to hold the day's gains very well.

As noted yesterday, for the past 8 years it has been very unusual to see much selling pressure at all in the days before the Labor Day holiday, so perhaps that seasonal influence will allow stocks to continue to levitate for a bit longer.

Usually though, the extreme overbought readings like we've seen in the Short-term Indicator Score tend to take their toll and lead us into a pullback within a week or so.

It would be odd - and bullish for the next few weeks - if stocks managed to buck that tendency and show positive returns during the next week, especially following the holiday.

The price pattern the S&P has carved out is fairly bearish - a gap up, close below the open at a multi-week high while under the 200-day moving average.  Combined with the recent overbought conditions, it's a solid argument to expect a pullback.

Risk Level:  1 

Summary:  On August 22nd, we summarized the positives and negatives that had occurred during the month.

The positives were mostly sentiment- and breadth-related.  Basically, what we'd seen was on a par with past market crashes, and the major stock averages were following through in classic fashion with a bottoming process.

The negatives were technical, most troubling of which was the precarious nature of the market's overall trend.  We've been very close to tipping into a bear market, and depending on how you define it could very well already be mired in one.

The S&P 500 has now declined for four straight months, at least -1% each month, with the last month at least -4% and the worst loss of the four.

There were 6 other times this happened since 1929, all of them in July, August or September.  Here's how the S&P fared over the next 6 months:

9/30/46:  +1.4%

8/31/66:  +12.6%

7/31/74:  -2.9%

8/30/74:  +13.1%

9/30/74:  +31.2%

9/28/01:  +10.2%

That's mostly good, but in '74 there was a nasty shorter-term decline before a lasting rally.

Most of what we looked at in August suggested a 1-3 month rally was most likely.  There was potential for a longer-term bottom, but with the dubious market trend we're less confident in such a long time frame for a rally.  It's possible, just not as high a probability as the shorter-term rally was that we discussed earlier in August.