There is growing fear that mortgage defaults caused by loans that will reset at higher interest rates will continue to mushroom next year, putting tremendous pressure on the economy ”” and perhaps cause a recession. A recession would take a big bite out of corporate earnings, which are the key underpinning of stock prices.
“These coming resets are akin to a tropical storm off the coast,” says Jack Ablin, chief investment officer at Harris Private Bank. “Everyone is trying to figure out the magnitude of the losses. They don’t know if it will remain a tropical storm or turn into a Category 5 hurricane. Right now, we’re pricing for a hurricane.”
A stock chart analysis shows potential trouble. When the Dow industrials closed Wednesday below the Aug. 16 low of 12,846, it triggered a bearish signal from a more than 100-year-old forecasting system called Dow Theory. The weakness in the industrials (which make goods) confirmed weakness in the Dow transports (which ship goods), signaling a shift in the long-term trend from bullish to bearish. “Odds are, we are already in a bear market,” says [Denis] Amato.
For more on the Dow Theory:
http://en.wikipedia.org/wiki/Dow_Theory