Editor’s Note: After stock prices surged strongly on Wednesday and Thursday, we decided to look to see if we could determine whether this was a bear-market trap, or the start of a new bull market rally. Our findings may surprise you.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

“Put this bell on your pack.”

The odd-sounding order came from my guide, a lifelong mountaineer and expert tracker who (and I’m not making this up) answered to the nickname, Buck.

This took place several years ago, when I was hiking just outside Cody, WY. I’d been in the area several times, but my companions felt compelled to have me attach one of the little noisemakers to my backpack, and I obliged.

Buck continued to speak, as we got ready to move out.

“It helps to take precautions,” he said. “Also, make sure to carry pepper spray in case you meet a grizzly bear unexpectedly.”

As we started to walk, Buck cautioned me to “watch out for signs that grizzlies are in the area – like fresh bear [droppings].”

“How will I know when I see it?” I asked, not realizing that I was about to “step in” something myself – in this case, a joke that was on me.

“Because,” Buck noted with a wry smile, before turning away to head down the trail, “it’ll smell like pepper and have lots of small bells in it.”

There’s a reason I’m telling this story (besides figuring you could probably use a good chuckle right about now), and here it is: Being aware of your surroundings is crucial when you’re hiking the grizzly-infested mountains of Wyoming – and it’s no less important when you’re attempting to navigate Wall Street’s wilds.

Especially lately.

That’s why I wanted to make a special point to the folks who are viewing this week’s two-day rally as the potential start of a massive bull-market upswing. And that point is this: None of the factors that we were worried about before the rally have changed or gone away. Nor have any of the other potential pitfalls that we’ve repeatedly warned you about.

The U.S. Federal Reserve is still scrambling to deflate the asset bubble it created – and is trying to do that in an orderly manner (a mistake on both counts). But the backstory isn’t pretty. Banks are still taking big write-offs, and in some cases also are under investigation. And there still are many reasons to be worried about commercial real estate, the U.S. housing market, inflation, stagflation, soaring food and commodities prices, and stratospheric energy costs.

The other thing that concerns us is that the markets tend not to do well when bad news is interpreted as good news – as Citigroup Inc.’s (C) latest numbers were overnight. Somehow the Street thinks that Citi’s loss of a mere $2.5 billion this quarter is good because it was less than the $2.86 billion of red ink that the Street was expecting.

Let’s not forget that the beleaguered banking giant has written off nearly $40 billion in the past 12 months, revenue has fallen 29%, and that it is laying off 15,000 employees.

That brings us to the broader markets, and our belief that rallies like those we’ve had in recent days are suspect, at best. The data seems to support this.

The bottom line: As much as we wish this weren’t the case, the strength we’ve seen in recent days may be nothing more than a massive short-covering rally. [Interestingly, Money Morning Contributing Editor R. Shah Gilani said precisely the same thing in his "Inside Wall Street" column published earlier today (Friday).]

While it’s true that we may have a tradable bottom here that takes us as high as 1,370 or thereabouts on the Standard & Poor’s 500 Index (only about a 9% increase from current levels), such numbers are hardly impressive when viewed against the harsh light of history.

For instance, according to our friends at the Bespoke Investment Group, the 150 stocks with the highest short interest are up an average of 15.1% over the last two days (Wednesday and Thursday). Yet, at the same time, stocks with the lowest short interest have climbed a mere 2.2%.

Volume also remains light at 80% of total New York Stock Exchange (NYX) up/down volume, and well short of the 90% up day that typically accompanies real reversals, and which has historically represented the foundation of sustainable bull rallies. In addition, in crunching numbers last night (Thursday), we see no evidence that institutions are accumulating shares, which is, of course, something else that typically happens when the bulls come out to play in earnest.

Technically speaking, we’ve seen the Chicago Board Options Exchange Volatility Index – usually referred to as the VIX Index, and generally regarded as a proxy for fear in the markets – move higher as the markets have moved lower. But just prior to the rally, it was nowhere near the high levels that have characteristically preceded the serious reversals that fuel new bull markets [Editors' Note: For a recent Money Morning research report on "market bottoms" that explains this reversal concept in deeper detail, please click here.]

All of which suggests, once again, that while we may see a “dead cat bounce” for the next little while, there is ample room for another melodramatic move to the downside.

Boy do we hope we’re wrong.

[Editor's Addendum: If the whipsaw markets we're experiencing lead to the so-called market "SuperCrash," shrewd investors will be able to capitalize on once-in-a-lifetime profit plays. For a free report, which includes a free copy of CNBC analyst Peter D. Schiff's New York Times bestseller, "Crash Proof: How to Profit from the Coming Economic Collapse," please click here.]

News and Related Story Links:

• Money Morning Financial Commentary and Analysis:
  Inside Wall Street: That Ticking Sound You Hear Out in the Mortgage Market is the FHA.

• Money Morning Market Analysis:
  In Search of a Market Bottom: Position Yourself for Profits No Matter Which Way the Market Moves.

• Wikipedia:
  Dead Cat Bounce.

• Bloomberg News:
  U.S. Stocks Advance as JPMorgan Leads Two-Day Financial Rally.

Keith Fitz-Gerald
Investment Director

Money Morning/The Money Map Report

With the Dow Jones Industrial Average, Standard & Poor’s 500 Index and Nasdaq Composite Index all closing below key levels, I’m getting a lot of questions from investors. And the most-frequent query is this: "How low can it go?"

If you’re a serious investor, you’ll want to know where the markets are headed and what the maximum downside could possibly be. I’ve got some good answers for you. Let me show you some key numbers.

The Magic Levels

In a talk I gave last November, I warned that 1,329.26 on the S&P 500 was essentially a "trigger point" at which we’d start to hear recessionary talk from the U.S. Federal Reserve. And I stunned my audience when I told listeners we’d be down to that level by the middle of January.

We didn’t quite get there, but we didn’t miss by much. On Jan. 17, the S&P 500 closed at 1333.38. To the day, a Fed Governor broke ranks and used the "R" word.
The next trigger point, I said, would be when the S&P dropped past 1,303.91 – no later than mid-March [Please see related chart].

The bottom line: The S&P 500 closed Friday at 1,293.37, which means we can expect a whole new round of hand wringing from the "Inside the Beltway" crowd. Unfortunately, what we really need is for them to launch a carefully considered, decisive response to the problems at hand.

As for me, I’m now watching for the key Standard & Poor’s stock index to hit 1,291.02. If we drop below that level in the next few days – and if there’s no decisive countermove from central bank Chairman Ben S. Bernanke – my proprietary analytics suggest the S&P may retreat all the way down to 1,117.43.

Here’s something else to consider. As of yesterday’s close, the S&P is already down 17.9% from its peak at 1,576.09. But an additional drop of 11.2% drop from that peak that takes the S&P down to 1,117.43 would be detrimental on a variety of levels:

• First, that would put stocks well into official "bear market" territory. Now I’m not much for labels, myself, but I do know that this would have a major negative effect on investor sentiment – the stock market’s equivalent of opening Pandora’s Box.
• Second, investors would endure a multi-trillion-dollar haircut on top of the crew cut they’ve already received.
• And third, a downdraft of this magnitude could eviscerate retirement plans, much of that wealth never to be recovered.

Fortunately, there’s an easy and painless way to escape this pain.

The Bear Market Great Escape

Let me review some important steps for you to consider:

• Safety and Balance Wins the Race: Make sure you’ve got the bulk of your assets in the "safety and balance" category of investments. This category includes balanced mutual funds and bonds. Tried-and-true choices include such gold standards as the Vanguard Wellington (VWELX) and the PIMICO Strategic Global Government Fund (RCS).

• Global  Income Rules: We’ve said time and again that, in volatile markets such as the ones we’re dealing with now, dividends and income are crucial. But income that emanates from strong global trends is even better. Just because the U.S. economy appears to be falling apart doesn’t mean the rest of the world will, as well. The economic "decoupling" we’ve spoken so often about is real and there’s an increasing body of data to support our contention. The pundits who have been dismissive of this global economic paradigm shift will rue the day that they voiced their doubts. Well-managed and globally diverse companies will lead the way while helping you build up some thick financial armor. (We track a good number of these in The Money Map Report.)

• Fly Inverted: Pick up a few shares of so-called "inverse funds." That way you can concentrate on preserving your upside without dismantling your portfolio. History shows that keeping your powder [capital] dry is not an all-or-nothing process. You never want to put yourself in the position of having all of your investment returns totally dependent upon correctly timing the market. As the old market adage says, that’s like trying to catch a falling knife. Instead, we want to structure our investment choices so that we can "go with the flow." If you’re a sailor, you know that it’s a lot easier to get the tides right than it is to predict the waves.

I’m certainly not suggesting that a 1929 "Great Crash" is right around the corner. But there’s little question that the markets will stumble around for some time. The credit crisis that started with the subprime-mortgage meltdown is nowhere near finished. My own metrics show that this could become a trillion dollar problem. If that happens, it is going to take time for the markets to work their way through it.

But no matter how low the markets go, Money Morning will be here to help and keep you informed of the latest market news. [Editor's Note: To read Keith Fitz-Gerald's Money Morning research report, "Five Survival Strategies That Will Allow You to Profit Even in a Recession" please click here. The report is free of charge.]

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

For those of you who don’t know, the phrase "Katy bar the door" is British slang for "take precautions, there’s trouble ahead."

It’s a perfect warning for the present market.

Beginning in July of 2005, in presentations that I’ve made to investors – and more recently in articles that I’ve written for Money Morning – I’ve repeatedly warned that it would be "Katy bar the door" for both the U.S. economy and its stock market if three things happened:

1. The yield curve inverted.
2. The Standard & Poor’s 500 Index dropped to 1329.26.
3. And if Wal-Mart Stores Inc. (WMT) missed its same-store sales targets.

According to my analysis, if all three indicators hit simultaneously, the odds are very high that there’s a recession dead ahead.

Has that happened? Let’s look and see:

First the yield curve: The yield curve inverted in December 2005, practically to the day that I predicted it would. Usually, long-term interest rates are higher than short-term rates. And if you think about it, that makes perfect sense: The longer time period allows for greater uncertainty. Investors require greater compensation for that greater uncertainty – and that additional compensation comes in the form of higher interest rates. But when near-term uncertainty is higher than long-term unpredictability, the yield curve "inverts," meaning that short-term rates have actually climbed above long-term rates.

That’s bad.

Indeed, history demonstrates time and again that when the yield curve inverts, it almost always means the economy will fall into a recession within 18 months. The only time in the last 30 years that an inverted yield curve didn’t signal a recession, a bear market, or both, came in 1998, during the height of the so-called "Asian Contagion" financial crisis.

But there’s a story here – and it’s almost like an "asterisk." You see, when the Asian financial crisis hit, the U.S. Federal Reserve cranked up its printing presses and flooded the market with cheap money. That surge fueled the Internet bubble and, in a bit of economic slow motion, the housing bubble that followed. That set the table for the subprime mortgage crisis, and the credit crisis that we’re only now facing. You could argue that the central bank artificially pushed the downturn we should’ve experienced back then to the present day.

And that brings us to our second data point: The S&P 500: We dodged the bullet temporarily, but now, 25 months after the yield curve inverted, the credit crisis overwhelmed the Fed’s "soft-landing," and caused it to flounder. When my analysis demonstrated what was going to happen, I set up a system of  "tripwires" to warn me as market conditions deteriorated.

The S&P crossed the first tripwire when it dropped below 1,494.12 last December. It crossed the second tripwire when it traversed the 1,436.68 level, and continued south. But it wasn’t until it fell below 1,411.89 that it dropped into the "danger zone." Once that happened, I warned investors that if it closed below 1,329.26, a recession would be lurking ahead of us as surely as an iceberg sat awaiting the RMS Titanic.

We narrowly missed it – by 7.41 points – on Tuesday, when the S&P closed at 1336.67 – the day Richmond Federal Reserve Bank President Jeffrey Lacker broke ranks and publicly used the big "R" word. On Wednesday, the SPX closed at 1,326.45 – in iceberg territory. Then Thursday, the S&P 500 rebounded 10.46 points (0.76%) to close at 1,336.91.

At midday Friday, the ticker told us that the S&P was trading at 1,329.26 – meaning we’re back in potential iceberg territory. The S&P closed Friday at 1,331.29.

As this has all unfolded, we’ve also been feeling the pain of the whipsaw trading patterns we’ve seen in recent weeks. When the Dow Jones Industrial Average dropped more than 370 points on Tuesday, the Wilshire 5000 – which tracks almost half of all publicly available stocks – endured a whopping $500 billion haircut in a single trading session.

That’s bad, though we could argue that we’ll see a rebound, soon. Unfortunately, these trading patterns aren’t taking place in a vacuum, meaning there’s another indicator that we have to consider. Taken together, these two indicators are signaling that there are some very difficult times to come.

And that brings us to the third recession warning, the Wal-Mart indicator: Back in August, I warned Money Morning readers to keep a very close eye on Wal-Mart: If it missed its same-store-sales targets, I said, that’d signal trouble ahead. Last week, Wal-Mart reported that it had missed its same-store-sales target – and badly. The No. 1 U.S. retailer [and in a little-known fact, the largest private employer in both the United States and the world] said same-store sales rose a miniscule 0.5%, far below the company’s own 2% growth forecast. In a classic bit of Wall Street understatement, Bank of America Corp. (BAC) analyst David Strasser called it "another worrying signal for the health of the consumer."

Wal-Mart said gift-card redemptions were below expectations, as consumers held onto them longer than usual. What’s more, they used these cash replacements to pay for food and other necessities more often than ever before – instead of using them for discretionary purchases, or luxuries.

That’s not good.

For the fiscal year, Wal-Mart’s U.S. same-store sales rose just 1.4%, the lowest figure since the company began releasing this data nearly 30 years ago.

That’s even worse.

The "Wal-Mart Warning Indicator," as Executive Editor William Patalon has labeled it, is especially significant because an estimated 70% of Americans shop at a Wal-Mart in a given week. That makes the sales statistics for the retailing giant one of the most accurate and telling economic indicators around. [If you think that I'm making more of this than is warranted, consider that CNNMoney.com posted its own story about Wal-Mart's lousy sales report under the headline: "Wal-Mart's Distress Signal"].

Officially, Wal-Mart’s version of the story is that they had poor gift card redemptions. But I have a hard time buying that – pun absolutely intended. Wal-Mart isn’t a destination retailer known for gift carding. Couponing – and that annoying yellow bouncing smiley face in their adverts – maybe, but gift-carding … well, I just don’t buy it….

I think the more likely story is that the Average Joes who shop there [like my family] are feeling the heat of a three-alarm economic meltdown. Unlike our politicians, or our Federal Reserve chairman, who all seem to live in a rose-colored world, we’re cutting back on our shopping and our purchases. We’re also looking to make each dollar we have go farther.

Nor is Wal-Mart wallowing alone. Other big names like Macys Inc. (M), Nordstrom Inc. (JWN), and Target Corp. (TGT) are seeing their sales crater, too. In fact, of the 30 retailers Thompson Financial tracks, 58% have missed expectations.

The bottom line is that the U.S. market is trying to tell us that it’s ill, and these wheezing same-store-sales figures suggest that the U.S. economy may be a lot sicker than we believe.

And that’s why we need to take steps to protect our wealth, and to profit, both at the same time.

And let me underscore that these dual objectives are possible to achieve – even simultaneously.

We’ve articulated a "safety-first" investing strategy in a number of reports here in Money Morning over the past few weeks. Rather than go through that all again, we’re going to post several of those research reports here for your perusing convenience. Take the time to look them over. Trust me, it will be time well spent. Both reports are free of charge.

• Money Morning Investment Research Report #1: Five Survival Strategies That Will Allow You to Profit Even in a Recession.

• Money Morning Investment Research Report #2: How Dividend-Paying Stocks Can Help You Tame the Bear.

As for the debt-laden consumer that got us into this mess: Well, he’s out behind his local Wal-Mart, getting ready to back into the ditch that he helped dig.

Too bad Club Fed isn’t out there with him – since it provided the backhoe.

News and Related Story Links:

• Money Morning News Analysis:
  The Drumbeat for a Downturn Deepens as Service-Sector Report, Richmond Fed Official Both Point to Recession.

• Money Morning Investment Analysis:
  Three Places to Profit in Spite of the Fed’s Missteps.

• Money Morning Investment Analysis:
  The Three Secret Indicators That Will Pave the Way to Global Profits.

• Dow Jones News Service:
  Wal-Mart Sales Signal Retail Slump.

• Money Morning Investment Research Report:
  Five Survival Strategies That Will Allow You to Profit Even in a Recession.

• Money Morning Investment Research Report:
  How Dividend-Paying Stocks Can Help You Tame the Bear.

• Phrases.org:
  Katy Bar the Door.

• Web Site:
  RMS Titanic Inc.

• CNNMoney.com:
  Wal-Mart’s Distress Signal.

• Investopedia:
  Inverted Yield Curve.

• Honolulu Advertiser:
  Wal-Mart is World’s Largest Private Employer.