Late last year and again in early 2011, I made my prediction that U.S. house prices will fall between 7.5% and 10% in 2011. I’m sticking with that prediction and see analysts that had first been predicting a flat year for housing prices starting to make house-price loss forecasts for 2011.

Real estate info compiler Zillow Inc. reports that the average price of a home in the U.S. fell three percent in the first quarter of 2011 from the fourth quarter of 2010. It expects home prices to fall nine percent total for 2011. Michelle Meyer, Bank of America’s senior U.S. economist, predicts that U.S. home prices could fall five percent or more this year.

Robert Shiller, co-creator of the S&P/Case-Shiller Composite 20-City Home Price Index, says that U.S. home prices will fall five percent to 10% this year. According to his index, home prices have fallen 33% so far from their July 2006 price peak.

Most disturbing, about one-third of all U.S. homes that have a mortgage on them are worth less than their outstanding mortgage.

I’ve been involved in real estate and stocks for 30 years. I’ve been analyzing the economy for just as long. And, in that time period, and in my studies, I have never seen an economic recovery without a corresponding recovery in the construction and real estate industries.

Given that we have finished a 29-year down cycle in interest rates, how can housing prices possibly recover in light of rising long-term interest rates? Hence, you can see why I’m so suspicious about the apparent economic recovery we are currently supposed to be experiencing.

Michael’s Personal Notes:

I look around at my fellow market analysts and it seems I’m the only one left who still believes we are in phase two of a bear market. One by one, most of my colleagues have turned bullish.

In phase one of a stock bear market, stocks move lower quickly. This can be defined as the period from October 2007 to March 2009 (a period of 18 months), when the stock market fell 55%.

Phase two of a bear market works to bring investors back into stocks. Phase two is what’s often referred to as the “psychological” period in a bear market, when investors start to feel that the economy is improving and the stock market is a safe place to be again.

It is my opinion that we are presently in the late stages of phase two of the bear market. Phase two of a bear market can last twice as long as phase one, as it takes that long to convince investors they should get back into stocks.

Phase three, the final phase of the bear market, brings stocks back to or below the level phase one of the bear market took them down to. In this case, 6,440 for the Dow Jones Industrials. Phase three of the bear market is quick in nature. Stock prices fall rapidly. And, once they reach their low, they tend to trade in that range for months, if not years.

Sobering thoughts, I know. But this is my belief…we are in phase two of bear market.

Where the Market Stands; Where it’s Headed:

It’s hard to believe that the Dow Jones Industrial Average has risen 1,119 point this year, but that’s exactly what’s happened. The Dow Jones Industrials are up 9.7% for 2011 so far.

But if we look closer at the numbers, a different scenario reveals itself. In 2009, the Dow Jones gained 18.8%. In 2010, the Dow Jones gained 11%. In both cases, in 2009 and 2010—and this is important to note—the Dow Jones had a weak first four months of the year and a strong second half of the year. This year, we have the opposite, which gives me cause for concern.

Since March of 2009, when the Dow Jones hit an intraday low of 6,440, the market has risen 97%. This bear market rally, which still prevails today, is reaching the final stages of its limited life span.

What He Said:

“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons. Borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.

Wow! Things must be good again. The stock market just had its best first quarter run in a decade, up 6.4% for the calendar quarter ended yesterday. The U.S. Labor Department said that 216,000 jobs were created in March and the unemployment rate has fallen to 8.8%.

Good times are rolling again. Luxury retail brand Prada says that its net income rose to $355 million in 2010, up 150% from the year before. Most of the luxury-brand stocks are rising again, and this morning we have the NASDAQ saying it wants to buy the NYSE for $11.3 billion. Deal-making is back, big-time.

My gut tells me that this will all turn out to be a bad April Fools’ joke for investors.

Sure, I may be the only economist and stock analyst out there today who is warning investors. But I was also the only one telling my readers to buy gold at $300.00 an ounce in 2000, telling them to get out of U.S. real estate in 2005, and predicting a severe recession in 2007 when the stock market was at a record high. It’s okay; I’m used to going it alone. (Maybe that’s why this investment e-letter continues to gain 30,000 new readers a month.)

Okay. Enough talk. Let’s look at what is unfolding here:

Phase I of the bear market: Bring stocks down to the point where investors bail out of stocks, and create deep negativity and fear surrounding stocks and the economy. This occurred during most of 2008 and early 2009, culminating with the Dow Jones Industrial Average collapsing to 6,440 on March 9, 2009. Only a few months earlier, in October 2007, the Dow Jones was trading at a record high of 14,164.

Phase II of the bear market: Bring the suckers back in. Slowly spread the feeling that “the economy is getting better again” and “the worst is behind us.” Bring stock prices higher, make investors feel they are missing the boat on the economic turnaround. This morning, the Dow Jones sits 91% higher than it did in March of 2009. Greatest turn-around story of our generation! Unfortunately, Phase II of the bear market is close to turning into Phase III.

Phase III of the bear market: Just when the great majority of investors and citizens feel that the economy has fully recovered, pull the carpet from under their feet again. Start bringing stocks back down, some weeks slowly, other weeks violently. Phase III of the bear market is not far off. Ideally, it will hit when the current bear market rally has risen 100% from when Phase I ended, which would be 12,880 on the Dow Jones or five percent to 10% either way of that number.

Please read my “Personal Notes” and “Where the Market Stands; Where it’s Headed” commentaries for today below, as they relate to the above.

Michael’s Personal Notes:

It’s absolutely ridiculous to see so many investors and analysts glued to the newswire this morning waiting to hear the U.S. job numbers report for March. By this point, I’ve trained my readers to be skeptical about the “official” unemployment rate posted by our government.

Keep the following in mind:

1)      The job numbers are always revised the following month. For example, this morning the U.S. Labor Department released the March unemployment rate and the “revised” job numbers report for February.

2)      There has been stark criticism of how the government determines the unemployment rate. In compiling the “official” unemployment rate, the following are excluded: people who have given up looking for work; prisoners (1.5% of the working population); retirees who have involuntarily accepted early retirement; part-time workers who want full-time jobs; and professional students who stay in school because they cannot find work.

3)      Eight million Americans lost their jobs during the 2008-2009 recessions. If the U.S. created 200,000 jobs every month for 40 months straight (which it will not), it would take over three years just to be back where we were before the recession started.

Bottom line: I never trust the job numbers report. As crazy as it sounds, when the U.S. Labor Department said this morning that the official unemployment rate is now 8.8%, I added 75% to that number to get a real unemployment rate of 15.4%. The “underemployment” rate (includes part-time workers who want full-time work and those people who given up looking for work) stands at 15.7%.

Where the Market Stands; Where it’s Headed:

It was an outstanding first quarter for the stock market, with the Dow Jones Industrial Average gaining 6.4% for the quarter ended March 31, 2011. This bear market rally has more steam to blow off. And I’m looking for one more shot above the Dow Jones’ post-crash high of 12,391.29 set this past February.

Yes, I continue to see stock prices rising in the immediate term. But short-term, the market’s internals are looking worse. The bear market rally that started in March of 2009 is getting “long in the tooth,” as they say, and getting close to finishing its run. Part III of this bear market rally, coming to us soon, promises to be a doozy.

What He Said:

“I’m getting very worried about the state of the U.S. housing market and its ramifications on the economy. The U.S. could be headed for its first outright annual decline in home prices on record, adjusted for inflation. And I really believe this could be a catastrophe for the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, August 2, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else

The big news story this morning is the intervention in the foreign exchange markets by the Group of Seven (G7) industrialized countries to push down the price of the Japanese yen…something smart currency traders were expecting.

The European Central Bank, Bank of England, Bank of France, Germany’s Bundesbank, and the central Bank of Italy started selling yen this morning. The Bank of Canada and the U.S. Fed are reported to be doing the same sometime today. This is the first time the G7 have intervened in the foreign exchange markets in a decade.

How convenient for the U.S.

Let’s face the facts here: the U.S. is awash in debt. Our politicians are not decreasing the amount the government spends; they are increasing our debt daily. The U.S. cannot manufacture goods at the cheap rate China can. We cannot compete against China.

So how does a country deal with a national debt crisis while trying to revitalize its economy at the same time? It devalues its currency.

Back in the early 2000s, I started writing about the government’s “secret plan” to devalue the greenback so that we are paying back our creditors with ever cheaper dollars. The U.S. has done a masterful job at “quietly” devaluing the U.S. dollar.

Corporate America loves a cheaper greenback, because their overseas profits translate into more American dollars. The more U.S. companies earn, the higher their stock prices go. Hence, the stock market loves a cheap greenback.

But there is a fine line. If the greenback goes too low, as I have written before, foreigners will be less receptive to buying the U.S. Treasuries we so desperately need to sell to finance our ever increasing debt. The situation can best be referred to as “too much of a good thing killing you.”

The chart below shows the uncharted territory we are about to enter with the U.S. dollar. In the next few weeks, the U.S. dollar will fall to a record low against other world currencies. Get ready for the fireworks—could get really interesting here—and the only way to protect yourself from it: make sure you own gold-related investments.

                                                   Chart courtesy of StockCharts.com

Michael’s Personal Notes:

The more time goes by, the more I’m convinced that inflation will be a huge problem for the U.S. over the next few years.

On Wednesday of this week, the U.S. Labor Department reported that the Producer Price Index (a measure of wholesale costs) jump 1.9% in February from the previous month—the highest level since June 2009.

The government tends to focus on inflation without food and energy costs (what they call “core inflation”). I do not take out food and energy costs when I look at the inflation rate, because: (1) eating is an everyday part of life (we all have to eat); and (2) driving is an everyday part of life—we all have to drive to/from work, take the kids here and there, etc.

As the National Inflation Association recently pointed out, the cost to print one U.S. dollar bill has increased 50% since 2008. Inflation is right under the government’s nose.

Years ago, people were saying that there was no relation between inflation and the price of gold. Back then, I said that was rubbish, and I still say that today. There is a direct link between inflation and gold bullion. And, as a leading indicator, gold is warning of serious inflationary times ahead.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning up 1.7% for 2011. The selling in the markets, at least temporarily, has subsided. The Dow Jones was up a big 161 points yesterday and this morning Dow Jones futures are up another 80 points. Hence, you can see why I kept my cool through the week and stuck fast to my belief that the bear market rally in stocks is not over.

As I wrote earlier this week, my view is that the markets overreacted to the crisis in Japan…and I was a buyer in the market this past Tuesday.

Bear market rally in stocks…born on March 9, 2009…and alive and well today.

What He Said:

“The U.S. reduced interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of reducing interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in PROFIT CONFIDENTIAL, July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning that the coming real estate bust would create havoc with the banking system.

They moved quickly…

While I’ve been talking (maybe screaming) about getting out of U.S. government bonds because I think interest rates are headed higher, the folks at Pimco, who run the world’s biggest bond fund, took real action.

Pacific Investment Management Co. (“Pimco” for short) eliminated all government-related debt from its flagship $237-billion Total Return Fund in February.

In a posting on the company’s web site, Pimco says that the yield on U.S. Treasuries is too low to maintain demand for U.S. debt. The people at Pimco simply believe that interest rates are headed higher, thus it’s not a good time to own government bonds. Bill Gross, head of Pimco, recently wrote in a research report posted on Pimco’s web site that inflation is a more serious threat than most realize.

And that’s really what I’ve been writing about since last summer: Inflation will rise with the unprecedented amount of liquidity in the financial system. Interest rates will rise in advance of inflation. The proof is in the pudding: The bellwether 10-year U.S. Treasury has risen from a yield of 2.4% in October 2010 to a yield of 3.4% today. Even the Japanese crisis failed to rally U.S. government bonds (see more on that below).

Hence, when I say I’m short- to long-term bearish on stocks, with a 30-year down cycle in interest rates now complete and interest rates starting to rise, with gold confirming that inflation will be a problem in the months and years ahead, with a government that continuously fails to exercise fiscal responsibility, a perfect scene is being set for phase three of the bear market.

Michael’s Personal Notes:

It’s being called the “Japan Trigger.”

The worst-kept secret in the financial world is the devaluation of the U.S. dollar. What I find most interesting is that, in spite of devastating world economic events, we are failing to see any significant rally in the greenback sustain itself. In the aftermath of a huge natural disaster such as Japan is currently experiencing, the U.S. dollar is failing to rally. Just how sick is the greenback?

My colleague and expert stock market technical analyst Anthony Jasansky, P. Eng., said it best in an e-mail to me over the weekend:

“Michael, in the short term, with the U.S dollar being so oversold, it should be rallying. Most analysts thought Japan’s disaster would be the trigger. The same goes for the U.S. Treasuries. However, if the U.S dollar and U.S. Treasuries cannot rally following the latest world catastrophe, which would normally be favorable to the greenback, I would view it as another bearish sign. The Euro and Middle East crises have failed to give the U.S. dollar a lift. Now the Japanese disaster, so far, is failing to lift the greenback and U.S. Treasuries. The U.S. dollar could be in dire straights.

Our Hearts Pour Out:

With great sadness, we’ve all witnessed the devastation to families in Japan. Thousands lost their lives to the earthquake and its after-effects. This morning, millions in Japan have no water or electricity.

Here at Lombardi, we’ve appointed a committee to find the most effective way to contribute to those in most need in Japan. We’ve decided that 20% of all our profits from Lombardi Publishing operations this month will be donated to Japan earthquake victim relief causes.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens today up four percent for 2011. There are markets that trade down sharply on bad news and markets that trade up sharply on good news. By monitoring the reaction of stocks to events in the economy and world marketplace, astute investors gauge the strength of a market’s trend.

Frankly, I’m surprised to see the resiliency of this stock market. No matter how bad the news (Japan’s earthquake disaster, Libya’s threat to the oil market, signs of world inflation returning), this market just shrugs off the bad news and holds its own.

The bear market rally in stocks, born two years ago this month, remains intact.

What He Said:

“Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

There’s so much going on in the world today…so much to tell my readers…and I believe it all boils down to one opportunity for investors.

This morning we wake to hear the terrible news of an 8.9-magnitude earthquake hitting Japan. It’s Japan’s biggest quake in 140 years and it has unleashed tsunami warnings. Japan stocks were down 1.7% yesterday before the main exchange was closed to the earthquake. This morning, futures on Japanese stocks are down another 2.0%.

Where will these worried Japanese investors park their cash now? Conservative investors will run to the security of U.S. Treasuries (pushing yields down), while the more risk-loving investors will go for U.S. stocks.

The civil unrest in the Middle East continues. The largest economy in the Middle East is Saudi Arabia and unrest among anti-government demonstrators is growing there each passing day. The Saudi Tadawul stock index has fallen nine percent in only two months.

Where will these worried Middle East investors park their cash now? Conservative investors will run to the security of U.S. Treasuries (pushing yields down), while the more risk-loving investors will go for U.S. stocks.

China reported this morning that its consumer prices rose a whopping 4.9% in February. The Shanghai Composite has been declining, as investors fear that rapid inflation will continue pushing interest rates higher. In February, the People’s Bank of China raised interest rates for the third consecutive time in four months. But more rate hikes are needed to cool that economy.

Where will these worried Chinese investors park their cash now? Conservative investors will run to the security of U.S. Treasuries (pushing yields down), while the more risk-loving investors will go for U.S. stocks.

Hence, when I look at the 228-point drop by the Dow Jones Industrial Average yesterday, I see two things: investors taking some profits off the table and a market that doesn’t like a rising greenback. Investors are too quick to forget the same thing happened last spring. Some European countries encountered debt problems and investors ran to U.S. Treasuries, the U.S. dollar rose in value, and we started experiencing mini-market crashes as stocks adjusted to the stronger greenback. Same thing is happening now.

But I’m not throwing in the towel on the bear market rally just yet. In fact, I see the market weakness and the temporary strength in the U.S. dollar as an opportunity to accumulate quality gold-producing stocks at what I see as bargain prices.

Michael’s Personal Notes:

There are records and there are records…but this one is a doozy.

According to the U.S. Treasury Department, the U.S. government experienced a record $222.5-billion shortfall in February of this year. That means the government incurred $222.5 billion more in expenses in February than it took it in revenue.

So, when you hear the politicians talking about “cutting expenses” or “getting the books in order,” don’t believe them. According to the Treasury report released yesterday, government spending actually rose 1.4% in February.

I don’t see the politicians doing anything about the U.S. debt situation until they are pushed into doing so by a national debt crisis. It was the same thing with the housing bubble of 2003 to 2005. The government did not have proper oversight of bank lending practices until it was too late. Politicians are reactive, not proactive. I’m not blaming the current administration, but that’s how it’s always worked.

China is the largest holder of U.S. government debt followed by Japan. I often think about how long the foreigners will continue buying U.S. debt without demanding higher interest rates for their risk. Is it any wonder China has become a hoarder of precious metals, especially gold?

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this final trading day of the week up 3.5% for 2011. The bear market rally in stocks that began in March of 2009 remains intact.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in PROFIT CONFIDENTIAL, April 8, 2004. “We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in PROFIT CONFIDENTIAL, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.

Phase two of this bear market has been “long in the tooth” and, for the benefit of our over 30,000 new readers who joined PROFIT CONFIDENTIAL last month, I want to explain the three phases of a bear market, where we are today with it, and when we can expect the next phase to start (by which point we should all be out of the general stock market).

Bear markets start when they are not expected. In December of 2007, as investors and consumers were accumulating debt like drunkards to plough into real estate, at the point that investor euphoria was highest, a bear market in stocks was born. The Dow Jones Industrials fell from over 14,000 in late 2007 to 6,440 in March of 2009. We can pinpoint the exact day that phase one of the bear market ended as March 9, 2009.

Phase one of the bear market serves to take investor money away, to turn optimists into pessimists. By the spring of 2009, all the speculators of 2007 had their wallets cleaned out.

Phase two of the bear serves to bring investors back into the stock market. It works by giving investors the false hope that the worst is over for the stock market, the economy is getting better, and things are getting back to normal. Since March of 2009, the bear market has done an excellent job at executing phase two of its plan.

We’ve been in phase two of the bear market since March of 2009. It has been “long in the tooth” as they say, but it is not over. Negativity in the marketplace still lingers, the retail investor has missed the two-year rally in stocks, and we are nowhere near investor euphoria again.

In the short months ahead, investor confidence will continue to rise, more money will pour into the stock market and then, bang—phase three of the bear market will kick in. Phase three bear markets can take stocks lower than the original phase one did; in this case, below 6,440 on the Dow Jones Industrial Average.

I realize that many of my readers are thinking I’m crazing suggesting that the market could fall back to 6,400. Let me tell you, I’ve said crazier things that have come true. You would have thought I made no sense in 2006 when I said that the coming recession would be the worst since the Great Depression. Or you may have thought it hard to believe in 2002 (when gold was trading under $300.00 U.S. an ounce) when I said that gold was headed to $2,000 an ounce.

Bear markets take away the financial excesses of prior years, sometime prior generations. This bear market will be no different by the time it has completed its cycle.

Michael’s Personal Notes:

Yesterday, the price of silver marched to a new record high, close to $34.50 per ounce. But silver was not the only metal rising in price; gold is at $1,427 per ounce this morning after toying with a record $1,440 an ounce yesterday afternoon.

The rise in the price of these metals is telling us three big-picture things. First, the U.S. dollar will continue to fall in value against other world currencies. Second, inflation is a real threat. Third, the U.S. debt crisis will be a serious problem in the years to come.

Gold bullion is up $287.00 an ounce over the past 12-month period. The next step for gold is obviously $1,500 per ounce; the next stop for silver is $40.00 an ounce.

Many of my readers may not be aware of the fact that the Dow Jones U.S. Mining Index was trading at the 340 level in the summer of 2008. Today, it trades at 248. This tells me: (1) expectations for precious metal prices to continue rising are low, which is good for precious metal stocks; and (2) quality mining stocks have a lot higher to move in price before this bull market cycle in precious metals is over.

Where the Market Stands; Where it is Headed:

As a group, stock market analysts are a fickle lot. It’s only taken a difficult week of trading for analysts to start throwing in the towel on the market. Many investment newsletter stock advisors are now saying that technical damage has been done to the market for the up-trend in stocks to be broken. I don’t believe this.

Stock advisors were calling for a correction in stock prices and, now that we got one, they are jumping ship. As a contrarian, I’m sticking with my belief that we will see more gains from the bear market rally in stocks that started two years ago next week.

What will it take for me to turn outright bearish right now? I would need to see the 10-year U.S. Treasury yield over four percent (3.48% today), the market break towards 11,500, speculative euphoria break out among investors, or oil prices march towards $150.00 a barrel. Until then, it is more of the same for me: immediate-term bullish, short- to long-term bearish.

The Dow Jones Industrial Average opens this morning up 4.2% for 2011.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.

On the charts, the DOW and S&P 500 are managing to hold above key support levels at 10,000 and 1,040, respectively, but not before closing below these key technical levels in the recent sessions.

The bears appear to be in control, while the bulls are trying to hang on and minimize the losses. The blue-chip DOW closed below 10,000 on August 26 for the first time since July 6, when the index fell to 9,686.48. In the previous decline, the DOW held below 10,000 for five straight days from June 29 to July 6, prior to rebounding. The DOW has broken below 10,000 in five of the last six sessions to August 31. In our view, the breaks are worrisome and could point to a more sustained move below 10,000.

With four months remaining in the year, stock markets are negative and under selling pressure. Stock markets have closed lower in 17 of the last 25 sessions to August 30. The bias is negative, as stocks search for a bottom. Until we see it reach one, the downside risk remains high. The overall bias at this time is down, as reflected by the current level of the indices below key moving averages and chart tops. The key will be the ability of markets to hold as we move forward. I continue to be cautious due to a fragile technical picture.

The near-term technical picture has turned more bearish with weakening Relative Strength as of August 31.

Markets continue to be on fragile ground and this should not be a surprise given that the key stock indices were unable to break or hold above some topping resistance on the charts. The failure to break higher was a red flag and a signal of further potential downside weakness to come. All four of the key stock indices are negative this year and are fighting to find some support. The Relative Strength is weak.

On the charts, the stock indices are trading at a crux, below the key 50-day moving average (MA) and 200-day MA, along with the tops on the charts as follows:

Russell 2000 — 675
NASDAQ – 2,320
DOW — 10,650
S&P 500 — 1,125

The S&P 500 failed to break its key 1,100 level on August 18 and is back below its 50-day and 200-day MAs. The Russell 2000 is below its 50-day and 200-day MAs.

While there is some decent support on the charts, I continue to see a “death cross” on the charts for all four stock indices. This is a situation in which the 50-day MA is below the 200-day MA. This is a dangerous bearish indicator. I’m not trying to scare you off, but just warning you to be on alert.

I continue to be cautious given that markets need to receive some oversold buying support at the lower supports. As I said, the recent failure to break above the chart tops is bearish.

One of the best companies to follow is E.I. du Pont de Nemours and Company (NYSE/DD), more commonly known as DuPont. This 208-year-old company is perhaps the greatest economic barometer due to its diversified global operations. If you want to know what’s happening in the industry, then all you have to do is follow DuPont.

The company just reported great second-quarter earnings and the numbers handily beat consensus estimates. This is a real accomplishment in this economy.

DuPont reported outstanding sales growth of some 26% to $8.6 billion in the second quarter. At a time when most large companies are struggling to generate any sales growth at all, this is a tremendous performance. Not only did the company experience higher selling prices in most of its markets, total volume of products sold grew a solid 21%. And the good news is that the company’s domestic U.S. operations experienced solid growth. Total U.S. sales grew 18% to $3.6 billion. Asia Pacific operations grew 47% to $1.8 billion.

Naturally, this strong performance translated right to the bottom line. Net income tripled to $1.2 billion, compared to 400 million dollars in the same quarter last year. And, to top it all off, DuPont increased its earnings guidance for all of 2010 to between $2.90 and $3.05 per share, up from the previous estimate of $2.50 to $2.70 per share.

I always make a point of following DuPont and its financial results. I don’t own the stock, but what the company says about its operations is telling because of all the businesses it operates: chemicals; agriculture; electronics; and automotive.

But, for all the good news at this particular company, the equity market isn’t much enthused. Investors are caught in a funk, just like consumers. We’re in a bear market and sentiment just isn’t strong enough to carry good news. That’s why some downside protection in this market is a must.

I’m worried about after earnings season, when equity investors will have to rely solely on economic data. Sentiment is already fragile and the stock market seems only willing to act mostly on bad news while ignoring any good news. We’re getting technical bounces in stock prices, but I think we’re still in for this large trading range around Dow 10,000. If corporate earnings aren’t good in the third quarter, then we could be talking about a new consolidation around Dow 8,000. It’s a bear market, so anything could happen.

It’s a tough stock market to make any money from. With sentiment changing almost every day, one might as well just trade index futures. In this market, the likelihood of owning a runaway winner is so small that it would really come down to blind luck.

The timing isn’t right yet to be making any bold moves in equities. You can trade around earnings news, but the returns are small. We’re likely to get more of the same from the broader market — a wide trading range around Dow 10,000. Once earnings season is over, however, the market will only have economic data to trade on and, so far, this news hasn’t been good enough.

I do feel that some sort of portfolio insurance is a useful strategy to consider over the next couple of quarters. The fact is that investor sentiment remains locked in a bearish mindset. Companies are generally saying that business is getting better, but investors don’t believe that they can outpace the economy. Revenue growth needs to be more robust for any stock market rally to sustain itself.

Right now, there are a number of attractive large-cap stocks that offer high dividends to shareholders. These stocks are the most attractive in this market on a relative basis. For speculators, you can trade the index and you can trade precious metal producers. You probably would be better off investing in real estate.

I’m not hugely bearish on stocks, but I see mediocrity in the numbers. No growth equals no growth, and this applies to revenues, earnings, and stock prices. Sitting with money in equities in a no-growth environment only works if you collect big dividends. In the absence of a bull market, equities don’t really make a lot of sense. Mind you, there isn’t a lot else to consider if you have money to put to work. Cash and bonds certainly don’t pay much.

A lot of investors are sitting on the sidelines waiting for a catalyst to take action. While there are always big risks out there, I don’t think we’re going to get a big catalyst anytime soon. Both the economy and the stock market need more time to balance themselves out.