The market is at one of the most critical junctures of the year, as the threat of a bear market is looming larger than in the past. From a technical perspective, the S&P 500 index (SPX) is trying to break below its 20-month moving average, currently at 1,410. This is the technical line of demarcation between a bull and bear market.

Fueling the weakness behind the potential move into bear territory are more fundamental breakdowns than the market has had to face in years. Inflation is colliding with a slowdown in growth (that’s called stagflation), there’s continued turmoil in arguably the most important sector (financials), the housing market continues to implode, and consumer strength remains in doubt.
There are four stages to any rally, whether it’s in a stock, sector, or the market. A rally starts with the first stage - despair. That’s right, something as gloomy as despair kicks off a rally. We’ve all heard the term “the market climbs a wall of worry.” Well, the wall is tallest when there appears to be no light at the end of the tunnel. When investors have thrown in the towel. When you can almost hear a collective groan as investors look at a chart. This is “Stage One Despair.”
Why does this mark the point at which a rally will kick in? Well, if investors hate stocks, it’s likely that they’ve sold them. Most are familiar with the term “oversold,” or a point where a stock is technically due for a bounce. The same theory applies to investor behavior.
When despair has reached a climactic level, it signals that investors have likely exhausted all of their potential selling pressure. This means that the risk/reward balance has shifted away from risk, as there are fewer participants left to sell. Put simply, just as you can get the best seats in a theater when it’s empty, you can find the best deals on stocks when investors have left the market due to their despair.
We gauge whether despair has set in by monitoring sentiment indicators such as investor polls, options activity, analyst recommendations, short interest, and media buzz, among others.
Right now, pessimism is not at the climactic levels we’ve seen at past market bottom. Specifically, most indicators are not as negative as what we saw at the August bottom. The CBOE Volatility Index (VIX) monitors the Street’s behavior toward stocks which will provide you with what is likely to be the best buying signal you’ll see in the next six months. It’s not quite there yet. So you’ll just have to be patient.

Gold and silver are correcting now. Remember the economy is being rescued by Bernake. So that means demand for raw goods will continue and the inflation fires will start up again after the first of the year.