I hope everyone's Friday went well. Anything's got to be better than Thursday's implosion, right? Like I told you on Thursday, be leery of today's bullishness, as it was apt to be short-lived. Stocks fell hard yesterday, and were apt to bounce no matter what. The market's still on the losing end of the battle here. Sure enough, the market spent a little time in the black today before dipping into the red ink for a second day in a row. Friday's late action, in fact, may have been a death blow. We'll look at the details of today's tumble in a second. First I want to wrap up some of this week's more important economic numbers for you. I know economic data isn't the most riveting stuff in the world, but it's little things like keeping your finger on the pulse of the economy that make the difference between being a good trader and being a great trader. Don't worry - I'll be quick and let the charts do most of the talking. 707 Words of Economic Wisdom Since it's apt to be on our minds already today, let's start our look with the major numbers we heard on Friday... housing starts, building permits, and the Michigan Sentiment Index. The good news is, starts as well as permits came in better than expected. The bad news is, well, it was interesting to see how some of the media tried to put a negative spin on the numbers, saying they still weren't strong enough to conclude the housing market is back into the full swing it was in during the first half of the year. I'll let you decide for yourself. The facts are, the nation started 896,000 homes in July, and requested 943,000 permits. This doesn't completely put either data set back into their very bullish trends we all fell in love with through the beginning of the year, but it somewhat abates what had become a growing threat to the trend. As for consumer sentiment, traders were worried about the Michigan Sentiment Index falling from a final reading of 85.1 last month to an initial reading of 80.0 for August. To be fair, that's a trend-breaker, IF this first estimate ends up being anywhere close to the final (third) reading later in the month. But, even then I'm not sure it's something we need to sweat just yet. For the record, the Conference Board's consumer confidence score for August isn't out yet, but that index fell from 82.1 in June to 80.3 in July. Again, I'm not sure I'd call it a red flag. I plotted both measures on this chart so you can see it all for yourself. I don't see anything overly troubling yet. On Thursday we heard last month's inflation rate. It rolled in at 1.96%, up from June's 1.75%. In fact, we can now say inflation is trending higher again, perking up after the lull earlier in the year. Although a sub-2.0% inflation rate isn't problematic, Ben Bernanke and the Fed have to be eying the recent rise with concern. The Federal Reserve's been pumping increasingly-worthless dollars into the economy for months. It hasn't mattered yet, but you have to wonder if the cumulative effect of all those cheap dollars is finally hitting a critical mass, as indicated by a rapidly rising inflation rate. I think that's what's happening here, and I think the inflation chart leaves Bernanke little choice but to wrap up the QE efforts as soon a possible. Thursday's unemployment claims underscore the idea. One of the Federal Reserve's key criteria about how soon it will wind down the bond-buyback program is evidence that the employment picture is improving. With initial claims falling to a multi-year low of 320,000 last week, a big piece of evidence that we're seeing the needed improvement is in place. The continuing claims figure is knocking on the door of new multi-year lows too. Some of you will be quick to point out (and rightfully so) at least some of the reason the ongoing claims figure is falling is simply because people are seeing their benefits expire; it doesn't mean they have jobs. You could also argue that new claims are falling because there aren't many people left to lay off....the old "U6 versus U3" debate. We don't entirely disagree. We'll just add that even the more complete U6 unemployment rate is moving lower, and the number of employed people is rising. It's not red-hot job growth, but it's still net growth. Finally, Thursday's industrial production and capacity utilization numbers for July weren't great. They're not dire yet, but a couple more bad months and they will be dire enough to make us rethink things regarding the health of the economy. Capacity utilization fell from 77.7% to 77.6%, while the industrial production index was level at 98.9. Both measures have hit a wall of late. They've not slumped (for long), but you guys and gals know how this works - neither the market nor the economy likes stagnation. If we're not going to see growth, sooner than later we're going to see a contraction. That'll show up on the nearby chart of productivity and capacity usage if and when it happens, and will serve as an early warning of a weakening market. What concerns me most is the timing of much of this data. The jobs picture is getting better, and inflation is becoming a big concern. That's pretty much handcuffed Bernanke and the Federal Reserve into ending QE. Yet, key measures of economic and consumer health that aren't as directly impacted by the Fed's decisions are starting to wane at the same time the market is dealing with too much froth. If investors start to see red flags on the economic landscape, they could start to lock in gains on stocks they already know are overbought. That could make things rough for the next couple of months. Either way, I still foresee the usual Q4 strength kicking off in October. Truth be told, I'm kind of hoping we do get a sizeable pullback so we can go bargain shopping in the early part of the fourth quarter. And as it turns out, the odds of a sizeable pullback got even bigger today. Before we get to it though, there's one piece of trading business we (almost) need to take care of. Manitex is Hangin' By a Thread Does everyone recall the first and most important lesson in trading? If not, here's a reminder - never let a small loss turn into a big loss. That's the core of the (ok, my) internal debate surrounding Manitex International (MNTX) right now. I really, really like this stock, but I don't like the way it's been losing ground since our August 8th entry. It's not like we're deep in the hole here. MNTX is only off about 8% since our suggestion, which is nothing in the grand scheme of things for a small cap trade. But, shares are putting a ton of pressure on a known floor at $10.00. I don't mind that floor being used as a rally point, but if Manitex should break under $10.00 we're going to pull the plug. You might want to do the same if you're playing along at home. Like I said, I love the idea, but unless the market agrees at the same time, we're not interested in fighting that uphill battle. As usual, timing is everything. As for our other open ideas - Xerox (XRX), Commercial Metals (CMC), and Northwest Pipe (NWPX) - they're all fine for now. We'll take a closer look at all those stocks next week, and maybe even have a new idea for you in the meantime. The challenge right now is, if the market's in a freefall it's going to take at least 80% of stocks with it on that bearish trip. You know who doesn't seem to be having any trouble finding bullish ideas in this lousy market environment? Your friends over at the SmallCap Network Elite Opportunity. As I've mentioned before, the SCN EO is going to give you far more actionable ideas than we could ever give you in this newsletter. We've worked hard to have four for you right now, while the SmallCap Network Elite Opportunity currently has eleven open trades in its portfolio. Two or three of the most recent ones are still worth getting into too. If you'd like to know what those picks are, you can find out just by using your free two-week trial subscription. And if things continue to deteriorate for the market, the SCN EO will most definitely help navigate you that minefield. Take a look Or, copy and paste the following link in your browser: http://www.smallcapnetwork.com/?vmpd_ckstr[click_track]=SCN+Newsletter&vmpd_ckstr_redirect=/pages/SCNEO/v1/ Ho-Hum Not really a lot to talk about today. Stocks lost ground, but not a lot of ground after pushing back up and off the low. I would imagine after yesterday's drubbing a lot of investors lost interest in stocks for a while, and drifted out of some marginal positions heading into the weekend. Nevertheless, its worth noting the S&P 500 closed under its 50-day moving average line. Some will chalk it up to a pre-weekend malaise, and I don't disagree with that idea. I just don't know that it matters. That bearish crossunder is a pretty big deal, and it won't be undone just because we start a new trading week on Monday. By the way, the VIX didn't close above its 50-day moving average line to mirror the market's bearish move on Friday. It's sure putting some pressure on the 50-day line though, and the VIX still closed above its upper 20-day Bollinger band. Putting it all together, I think we have to conclude this is the beginning of a much bigger downtrend. That doesn't mean we're entering a new bear market. This shouldn't be anything more than a normal bull market correction. Rather than freaking out, we intend to use it to our advantage. We'll talk more about how we're going to do that on Monday.