The difference in yesterday’s action was that the Dollar’s stunning rise saw a bit of a setback. If it was just a fear of a double dip recession, then we would see bond yields drop and the Dollar also slip. Last week, this wasn’t the case. Fear of deflation would drive investors into a “preservation of capital” mode, thereby buying bonds and Dollars. That’s what we saw last week, without question. However, yesterday’s action was a little different. The market broke precipitously at the open. The Dow was off over 100 points and the S & P pushed right to the upper end of that short-term technical support range between 1057 and 1069. After bouncing off of 1069, we likely saw some short-covering on a trading basis. What helped make a difference was that the Dollar saw some profit taking, which suggests that yesterday was less about deflation and more about the double dip fear.

This week has a somewhat busy schedule of economic data, although the news is less than damming. We started the week with the New York Fed’s Empire State Index for factory orders. This pretty much played right into the scenario that the economy is seeing slower growth, but still growth. The index rose to 7.10 from 5.08. A gain to 8.3 was anticipated. Within this fairly narrow report, the component data were less than inspiring. Prices paid declined from 25.4 to 20.0. That’s not exactly a deflationary number, but a move in that direction. Prices received fell further into negative territory, -2.86 versus -1.59. There were two significant negatives for the economic picture. Shipments fell to -11.5 from 6.3. New Orders also took a dive to -2.7 from 10.1. It’s hard to get excited about a small uptick in the overall Empire Index when the forward-looking data are so bad. On the plus side, the Employment component jumped to 14.3 from 7.9.

We do have housing data due out this week, and the news isn’t likely to be supportive of avoiding a double dip. We started the news yesterday with the National Association of Home Builders’ Index for August, which dropped to 13 from 14. A little gain to 15 was expected. The catalyst within the index is that the expectation component for the future sales of single family homes fell to 18 from 21. This number has some weight in that we’ll get Housing Starts and Permits today, and how the homebuilders feel about the future is going to weigh on what they do. In short, don’t expect any help from those reports today.

Late in the day, the Federal Reserve released a bank survey showing the US banks had loosened credit standards for the first time since 2006. This was a quarterly survey of senior loan officers at 57 banks and 23 foreign banks doing business in the US. Banks also said that they have seen increased competition for commercial and industrial loans in the market. As for individuals, the survey showed banks lowered spreads on loan rates and reduced costs for credit lines (as if anyone has a credit line left). This is all well and good, but in the long run, individuals can only borrow if they have a job. To this end, what have we heard about a new jobs incentive bill? Nothing! This is politics at its worst and one of the reasons why market tends to decline in midterm election years. I know that I’m harping on this, but we all know that the only way to re-invigorate this economy is to get jobs, and private sector jobs, back on track. The Fed isn’t injecting enough capital to make risk taking a driving force. Meanwhile, Congress wants to argue about Freddie and Fannie. Republicans are pushing privatizing social security. Right now, individuals don’t even want to trust their 401ks to Wall Street. What makes anyone think that the best plan is to put control of a bankrupt system into the hands of Wall Street?

Yesterday’s modest bounce was nothing more than an oversold, short-term pop. Groups that had been badly beaten rallied yesterday. Semis topped the list, with the Philly Fed Index up 0.5%. Basic Materials also rallied, mainly due to a nice pop in the precious metals commodities. Crude was flat, and so were Energy stocks. The most “defensive” groups were down the most, suggesting that yesterday was little more than a reversal of the recent trend. One very interesting move was in volume. Clearly, fund managers must have returned from a week’s vacation to find the markets down 3% to 6% from when they left. That led to a nasty first-hour decline and rather heavy volume. In the first hour or so, the volume was equal to about half of Friday’s volume. When the market recovered, volume evaporated. The total NYSE volume was just 780 million shares. The average volume has been declining since early June, finally pushing the 50-day average down to 1.18 billion from 1.50 billion two months ago. These are the “dog days of summer”. It’s late, it’s hot, and it’s the last chance to take a vacation before school starts. The news is weak. Congress is making a last minute spurt to throw out topics of local interest with little conviction to get anything done.

Technically, the short-term trend is clearly down, but we’ve seen the market fall quickly to discount the latest whim. The Fed won’t stand by and watch deflation take hold like it did in the 1930s. Ben is too much of a historian for that. The decline should be more orderly from here. Look for bounces to sell into. Watch the action in the Dollar, as it is measuring the fear of deflation. Bonds are in panic mode over the economic weakness and deflationary impact. This bounce may carry the S & P up to 1087, with stiff resistance looming at 1100. However, it is difficult to see where the good news will come from to get the market up to that level. While we saw a nice bounce off of 1069, the next downside likely move is to the mid-July low of 1057. We’ve got more work to do on the downside, so stay cautious.