If you're a trader, the last 5-6 days have been ferocious.  Volatility is usually a trader's "friend," creating nice opportunities to make sizeable profits on both sides of the market.  In this case, the volatile markets have mostly been one-sided...to the downside.  So, what does this mean for the near future and longer term outlook?  How long may this downturn last, how far will it go, and is there light at the end of the tunnel?   What's causing this bearish move?  We hope to find answers to these questions and more.

CHARTING THE WATERS
 
From a chart perspective, the markets were showing 'topping' features way back in early March.   Some of the signals we use to extrapolate 'toppiness' are lower volume up moves, breakdowns below moving averages, falling relative strength and lack of leadership.  To be sure, the Nasdaq trailed all others in performance ... a negligible effort at best.  Markets generally rise on the back of growth.  In early March when the Dow and S&P 500 were reaching for multiyear highs, we cautioned that there was a treacherous ride ahead.  This turned out to be the correct call, even in the face of ever stronger bull calls.  Once the breakdown occurred, there were no supporting price levels ... for a six-week stretch the markets have cascaded downward with the greatest of ease ... the last week being the hardest time of all.
 
IS IT STILL THE ECONOMY?
 
We've spoken about this many times, but inflation fears are warranted.  Higher oil prices are going to crimp economic growth. We've seen the evidence in retail sales figures, and it is also going to force higher prices at the consumer level, as we've also seen evidence here in the CPI numbers.  Economic growth numbers are optimistic at best.  Certainly when these forecasts were made, some of the other issues such as better trade, a strong dollar and low inflation were considered.  But, this hasn't been the case.  Interest rates?  Going higher ... probably higher than most want or would expect.  As economists ratchet down their numbers for growth and increase their numbers for the Fed Funds Rate, well, you can see this is a double whammy.  It doesn't appear this situation will change anytime soon.  The plain fact is that the economy is slowing down and may very well dip into a recession, which may only happen if the Fed hikes rates at a faster pace than their current 'measured' pace.
 
WHAT ABOUT THE FUTURE?
 
Let's understand something about markets:  Current stock prices are discounting 6-9 months into the future.  What does this mean today?  Likely that the economy will show slower growth (if any) in the 3rd and 4th quarters.  Pick any reason for slow growth today and it'll likely stick.  The markets will not be giving anyone outlandish returns anytime soon...probably single digit returns.  At best, the markets should consolidate and churn for the next year or so.  We are near the start of a LONG TERM bear market, and we've just finished a bull rally within a bear market.  Why is this a bear market?  Define your terms...what is a bull market?...what is a bear market?  A bull market is one that goes UP, a bear market is one that DOESN'T GO UP.  Not necessarily going down...see the difference?  But as traders, we can work diligently to find the best trading opportunities for whatever timeframe we are in.  This is a very exciting time for active traders as short-term volatility should stay high.  I hope you can grab your trading profits when given the opportunity!!  

Price Headley is the founder and chief analyst of BigTrends.com.