For Discussion: U.S. Stock Market
The tug-of-war between the U.S. stock market's bulls and bears continues at/near Dow 11,000, with each side arguing that the evidence supports where they think the market is headed. But who makes the stronger case for their market direction over the next six months? REUTERS

The battle -- call it an ongoing feud -- between the U.S. stock market's bulls and bears continues, with each side trying to make an overwhelming case that the data supports their view of the world: the next demarcation line appears to be the Dow 11,000 level.

The market's bulls argue that despite the fact that U.S. economy is growing at a tepid rate, private sector lay-offs most likely have peeked, the worst financial and economic news probably is over, and that the Dow's ability to hold support at/near 10,700 over the past three weeks is a signal by institutional investors that better days are ahead.

Conversely, the market's bears argue that the substantially smaller U.S. workforce, stagnant income in many job classifications, an economy that's short -- at minimum -- about 14 million full-time jobs, and that ongoing pain-in-the-neck -- Europe government bonds, or sovereign debt -- means the Dow is sending a false signal, and is headed for a fall.

Let's do a condensed, cross-methodology analysis to see if we can arrive at an informed investment decision / conclusion regarding where the Dow is headed, near-term.

Technical Indicators: Bearish. The Dow is firmly below the 50-day (12,005) and 200-day (11,990) moving averages -- which is bearish. However, the Dow, as noted, did hold support at/near 10,700.

Fundamental Indicators: Slightly Bearish. The second quarter earnings season turned out to be slightly better than expected. However, the U.S. economy, as measured by GDP, is growing at a very slow rate, and the August Philadelphia Fed regional manufacturing index plunged to minus 30.7 from 3.2 -- a level that shows a steep decline in goods-producing activity; another month or two of poor factory data would indicate an economic stall. What's more, the economy has not demonstrated that it can create the minimum 150,000 to 200,000 new jobs per month, just to lower the nation's high unemployment rate (presently 9.1 percent).

Monetary Policy: Bullish. Inflation remains low, at the core level (which excludes food and energy prices). That relatively low inflation, combined with the output gap, means the Fed will at least continue to reinvest the proceeds of the second stage of it's quantitative easing policy to help stimulate the economy, QE2, through at least the start of the fourth quarter, and perhaps for longer. Further, in his upcoming speech Friday at the Jackson Hole summit, U.S. Federal Reserve Chairman Ben Bernanke may announce a gradual third part to its quantitative easing program; the view from here argues there's a 50/50 chance he will do so.

Fiscal Policy: Bearish. The U.S. Congress, led by Tea Party-pressured Republican majority in the U.S. House, won the debt deal debate, and as a result Congress will implement austerity measures soon. Deficit reduction and weeding-out needless programs are laudable goals, but reducing the deficit too fast - especially if spending cuts affect the social safety net -- reduces demand, PIMCO's Bill Gross, among others, argue. The stragey could also increase social problems -- leading to even higher social costs down the road.

Credit Markets: Recovering, but still strained, with still too many small/medium-sized businesses arguing they're not getting the level of credit they need to expand operations. Home mortgage qualifications terms remain very high. Home mortgage rates, however, are at/near 50-year lows for home buyers with excellent credit.

Meanwhile, Europe's sovereign debt situation has clouded, and there could be more financial market ripples. There's chatter that a French bank is heavily exposed to high-risk debt in Greece, but so far, no hard evidence. Portugal or Spain are also keeping investors awake at night: some analysts say each will require a bail-out. So far, each has said they will not need outside intervention funds.

Conclusion: The view from here argues that the outlook for U.S. stocks and the U.S. stock market is slightly Bearish for at least the next three months -- through mid-November. The bias is to hold off considering new stocks or adding to current stock positions, at least until mid/late September.

Given the above technical and fundamental indicators, and the seasonal reduction in money flows and trading volume in the summer months, pull-backs in the Dow and S&P 500 are likely to occur. Underscoring, the current stock market is highly selective, and the bias is toward only deploying capital in those clear-winner stocks.

In sum, the market needs bullish U.S. economic data to support the Dow. If it does not occur, Dow 10,000 will give way, and a drop to Dow 9,600 to Dow 9,700 would likely follow.