Source - http://www.onlineinvestingai.com

The chart to the left is of the economic investment cycle. The blue shaded area represents  the stock market and the yellow the economy.

The first thing you’ll notice is that the stock market  typically bottoms and peaks 6 months to a year before the economy does. This chart also shows that bull markets are formed on the back of a healthy financial and transportation sector.

You’ve probably noticed that the financial sector began to recover thanks to the billions of dollars in backdoor handouts that the Fed has given it. The transportation sector seems to have found a bottom as well as imports and exports rise.

But the problem is that banks still aren’t lending. Consumer credit has dropped for 11 straight months. That’s a record. And with contracting credit comes contracting purchasing power.  Prices inevitably go down (I love cheap milk!).That’s deflation.

Another nagging question is exactly how the banks will do once interest rates rise and the Fed shuts down the printing press. If banks aren’t lending now, I doubt they’ll lend in a tight-money environment.

My prediction: Second half of the year, when the stimulus and quantitative easing wear off, we’ll run into some “rough patches”.

As an investor, you have to realize that the market will start to price in weakness as soon as the data starts coming in weaker. The big clue for you will be if the market sells off because economic data has come in under expectations. If you see that “under expectations” phrase one too many times, you’ll know the repricing is coming.