By: Larry MacDonald

On Friday, Nov. 14, stock markets were on their way to confirming a bottom to the bear market but got blindsided by another wave of forced selling by mutual/hedge funds in the last hour.

The day before, markets retested the Oct. 10 lows in convincing fashion. They looked past the jump in U.S. jobless claims to stage a spectacular rally in the afternoon. On Friday, a plunge in U.S. retail sales hit markets in the morning but a rally again took hold during the afternoon and was edging into the green by 3PM when dumping by mutual/hedge funds brought the market down the express elevator to the day’s lows.

In short, it looks like the customary rally from a retest of the bear-market’s low faces greater headwinds compared to past cycles. In one corner, we have the technicians bidding up the market on expectations historical patterns will repeat. In the other, we have the immeasurable impact of forced deleveraging (including a contraction in lending).

Then, fourth-quarter earnings are due in January. Brokerage analysts, as usual, are still behind the macroeconomic curve as it enters the downturn phase. Their estimates are starting to come down, but they are still “far from throwing in the towel on their earnings forecasts,” as Peter Lim wrote in the New York Times.

According to a Thomson Financial survey, analysts still expect S&P 500 companies to grow profits more than 12% in 2009. Given they aren’t expecting much for the first two quarters of 2009, the estimates imply “a tremendous profit surge in the latter half of 2009,” noted Lim. In January, therefore, there could be a raft of poor earnings releases that knock earnings projections down even lower. So it looks like a toe-dippers’ market still.