We are moving into a new phase, from collapsing to rebounding to recalibrating.

The upward bias in prices remains until the extremes in bullish sentiment are unwound.

After two down weeks, investors are starting to wonder if a bigger selloff could be brewing. The start of the third-quarter (in US) reporting period could provide some clarity. Since hitting rally highs nearly two weeks ago, the broad S&P 500 index has lost 4.3% as investors have sorted through a spate of manufacturing, consumer and jobs reports that have missed forecasts.

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The standout was Friday's September jobs report, which showed the unemployment rate spiked to 9.8%, a new 26-year high. On top of that, employers cut a whopping 263,000 jobs from their payrolls during the month. But the stock market's decline over the last two weeks was pretty minimal, considering the nearly seven-month run up that propelled the S&P 500 by 51.2%.

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That rally was driven by extraordinary amounts of monetary and fiscal stimulus and a spate of "less bad" news as the economy moved from recession to stabilization to the start of a recovery. The Institute for Supply Management's service index, which covers businesses including hospitals, retailers and financial services firms, is expected Monday. The service index has fallen for the past 11 months. Last week, the group's disappointing report on manufacturing helped drag down the market.

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Investor sentiment changed little as the 3rd quarter came to an end. The "smart money" continues to sit tight and has yet to tip its hand. The "dumb money" or retail investor (sorry, no offense meant to those who have been right for the last 3 months) continues to buy the dips aggressively. Company insiders continue to sell in record numbers. In the end, it is the same story as "the trend is your friend until it ends". Still we feel that the upward bias in prices remains until the extremes in bullish sentiment are unwound.

-JK