IS THIS the start of a major market capitulation or is this just a much needed pullback following six months of breathtaking gains?

The jury is still out on the issue, but many market players were not taking chances as they bailed out following four days of slides on Wall Street amid weak jobs data which suggested that the economic recovery could be less robust than expected.

With Hong Kong and Tokyo breaking below key support levels, the Singapore market had only one direction to go: down.

The Straits Times index fell for the third consecutive session, losing 20.80 points to 2,583.73 - the first time the benchmark index has fallen below the 2,600 level in just over a month.

But the topline index did not tell the full story, which was the heavy forced selling on speculative penny stocks amid a slew of margin calls.

Counters such as Golden Agri, Memstar, Oceanus, China Animal Health and numerous other penny stocks which had been hogging the volumes list continued to do so, only this time on high volume selling.

Property stocks featured prominently on the losers list, with counters such as City Development, Haw Par, Ho Bee, Allgreen, SC Global and Keppel Land ending lower.

This came amid a warning by Bank of America-Merrill Lynch that private home prices had peaked in the July-October quarter and could slide over the next 12 months. 'Previously, we expected quarter-on-quarter momentum to extend until end-2009. However, we now believe the peak has been brought forward given the higher-than-expected 3Q09 growth. Hence, we expect stocks to trend downwards from here.'

So where is the market headed?

The general consensus seems to be that market risk has increased substantially with stocks having run ahead of the economic and corporate fundamentals.

New York University professor Nouriel Roubini, who accurately predicted the financial crisis, said that stock and commodity markets could drop in coming months as the gradual pace of the economic recovery disappoints investors.

'Markets have gone up too much, too soon, too fast,' Prof Roubini told Bloomberg in Istanbul over the weekend. 'I see the risk of a correction, especially when the markets now realise that the recovery is not rapid and V-shaped, but more like U-shaped. That might be in the fourth quarter or the first quarter of next year.'

In a report yesterday, DBS Vickers advised investors to switch to a 'sell-into-strength' strategy in anticipation of further slowing in trading activity in the lead-up to the year-end.

'We see downside to 2,400 (or even 2,350) before the correction ends,' the report noted. 'We think penny stocks, which enjoyed hectic trading interest in the past two months, may bear the brunt of the selling.'

Similarly, DMG & Partners told investors to sell upon the break of the 2,600 support mark (which has already happened), noting that 'this would signal that additional downside is forthcoming while the bearish sentiment gains momentum'.

The conclusion that one gets from talking to market specialists is that stocks are way too expensive relative to the prevailing economic realities.

Though Asia's economic recovery seems relatively firm, there could be fewer and fewer earnings upgrades in the days ahead.

The dilemma for markets is that if the economic recovery gains strength, there is the increasing danger of policy tightening by governments and central banks. On the other hand, if the macro outlook weakens, corporate earnings will stumble, thus sparking another bear raid.