Based on yesterday's close of 11,985, the Dow Industrials index has fallen 3% from a peak on 18 February but is still 7% above the "six-bear average" path derived from recoveries after prior large declines – see first chart and previous post for more details.

The six-bear average has proved a reasonable guide to the trend in the Dow since the March 2009 trough. The average fluctuates between 11,100 and 11,600 until the autumn, when it slips below 11,000.

Examining the individual components, five of the six prior recoveries suggest a fall from the current level by year-end – see green lines in first chart. In one case, however, the Dow embarked on a final blow-off to a level equivalent to 16,000 currently – top line. (This refers to the rise from the bear market low in November 1903.)

As previously discussed, monetary trends are signalling a peak in global growth this spring. Momentum peaks are often associated with weakness in risk assets, including equities. G7 annual real narrow money growth, moreover, remains below industrial output expansion, a condition historically associated with sub-par equity returns. These considerations support the cautious message from the six-bear average, suggesting a defensive investment stance.

A short-term spurt higher, however, cannot be ruled out, based on the ongoing injection of liquidity by the US authorities. Banks' reserves at the Federal Reserve rose by a further $66 billion to $1.36 trillion in the week to Wednesday and are on course to reach $1.7 trillion, or more than 11% of GDP, by mid year, assuming that the Fed completes QE2 and the "supplementary financing program" is reduced to $5 billion and remains at this level. Bears, therefore, may wish to keep positions light until the Fed's liquidity boost is nearer completion.