With today's mild rally, followed by a weak close, the market demonstrated indecision more than anything. Looking at the SPY one day chart, we can see the range bound action late in the day, and the end of day selloff. I kept expecting the market to take off, but every move toward the highs was met with sellers.



The sense I get is that too many participants are in a forced sell mode due to margin calls or other manifestation of investment strategies that are now failing. It is impossible to know how long this process will take. It is difficult to find a trading edge in such an environment.

There has been considerable speculation as to whether the crisis and government reaction will be inflationary or deflationary. Certainly when it comes to the dollar and most commodities, market action has so far indicated the latter. Steve Saville asserts that the initial deflationary trends will give way to inflation with respect to certain asset classes, particularly gold.

By way of further explanation, during the early part of a major upward trend in money-supply growth it will typically be the case that inflation is not widely perceived as a problem. Actually, it's quite likely that deflation will be seen as the bigger threat. This is the situation that we often refer to as a "deflation scare" -- rising money-supply growth (inflation) combined with rising fear of deflation, with the fear of deflation being fanned by falling commodity and equity prices.

During the early part of an inflation cycle the demand for cash balances will tend to be relatively high -- due to falling inflation expectations -- and the average economist will perceive a low "velocity of money". But as time goes by the effects of the increased rate of money-supply growth will start becoming apparent and people will become a little more conscious of the inflation threat, the result being a decline in the demand for cash balances (people will begin to save less cash). The average economist will interpret this as an increase in the velocity of money and may well conclude that prices have begun to rise in response to the increased velocity.