Since the previous edition of the Sterling Weekly, the Dow Jones Industrial Average lost 803.67 points or approximately 7.6%, to finish at 9,816.49 It has been 3 weeks since the previous edition of the Sterling Weekly, and the market has continued to be under pressure. In the May 17th edition of the Sterling Weekly, I discussed my thoughts about the Dow Jones Industrial Average entering a retracement phase and my expectations that the Dow would pullback to somewhere between 9,625.37 and 8,099.71. I continue to expect this downward move to end somewhere in that range, however we might see a slight rally at somepoint before the downward movement runs its course.

In looking at the various indices I track, including the major market indices and the various sector indices, all of them are showing a significant pullback from their highs set earlier this year. I have always been a firm believer in a couple of key things relating to the market. The 1st being that politics is the single biggest influence on the market; and the 2nd being that the Dow Jones Industrial Average is the best indicator of where the economy will be in 6-12 months.

So, the question becomes what is the market currently telling us? As much as I hate to say it, I think the market is forecasting a decline in the US economy, most likely resulting in a double dip recession in 2011. My concern is that this second recession will be much more severe due to the recent polical activity and as a result we could see unemployment in the 12-14% range. If that is the case, then I would not be surprised to see the Dow Jones Industrial Average trading around the 7,000 level. Wish I had better thoughts on things, but that is what I see.

Unfortunately this also leads me to see higher budget deficits and the very real possibility of higher inflation and interest rates. Finally I see a deflation in the commodities market due to a contraction of liquidity in 2011. Ouch! I am not sure I feel comfortable making any short sale recommendations today; but that may change if we get the bounce I expect at some point in the future.

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