The worst thing about yesterday's market action was that there was no new low. The end-of-day rally started off convincingly, but fizzled. Whether it was the failure of the Nikkei and the yen to conform to Shinzo Abe's jawboning, or this morning's ADP figures and the lowest unit labor costs since 1947, investors seem dumbfounded. Overnight futures are whippy -- all over the place.
Declining unit labor costs, especially with the Fed supposedly trying to stimulate employment, is a red flag for deflation.
Few understand how deflation really works. Most see higher food or gas prices and think deflation is absurd, that "rising prices" represent inflation. In a credit and debt economy such as ours (as opposed to the cash economy that we used to be in the 1970s), higher food and gas prices siphon money away from savings and investment, and snuff out the desire to take on new credit. A reduction in new credit is what causes actual deflation. The desire to conserve funds is the psychological trigger.
Do not underestimate the power of psychology. Do you hear any of your friends bragging about how much they paid for a nice polo shirt? I doubt it. But they probably brag about how little they spent.
Today's zones seem to be 1647-1650 or possibly even a small volume shelf in the 1653 area. Below, well, there's 1600.
I still think the market is in a correction and can continue lower, but it would take a swift crash-type event to make think otherwise.