Since July 19 this year, when Dow Jones Index rose to a record 14,000 points, it is down to 12,845 at yesterday’s closing (even falling below 12,600 at one point). That is almost 10% drop in less than a month, nearing the official definition of a market correction. Is this a precursor to a bear market? Here are CNN Money’s 5 ways to know:

1. Rising oil prices. High energy cost triggers fear of inflation, and Federal Bank typically counters by raising short-term interest rates, which deflates stock prices. Oil price has soared 20% so far this year.
2. Rising Treasury yields. As the yield of 10-year Treasury notes rises sharply, investors often turn away from stocks in favor of the security of notes and bonds. The yield has not changed much this year yet.
3. Falling number of growing stocks. If the broad indexes are being pulled up by only a few large company stocks, while others are falling around them like ninepins, that cannot be a good sign. Over the last few weeks, almost four times as many stocks hit 52-week lows as highs.
4. Falling consumer spending. If we buy less, it stands to reason that the product-oriented industry will suffer. Retail sales dropped almost 1% in June, and the continuing housing market crunch can force consumers tighten their money-belt even further.
5. Falling corporate earning growth. If corporate earning slows, the market will slow down as well. Low productivity growth, inflation fears, high long-term interest - all of them dissuade companies from borrowing money. We won’t know till 2007 earning reports are out.

In short, we do not know. Even though this type of analysis is better than those based on charts alone (the so called “trend analysis”), predicting the future based on past events is still notoriously difficult, if not impossible. The only certainty about the market is in its past, a classic example of “hindsight being the perfect science”.

See related posts:

1. Anticipating Bernanke’s next move