Yesterday, the Australian stock market fell nearly 60 points - or 1.3% - on heavy volume. It was the steepest one day fall in...we don't know, but its seems like a while. There was no real catalyst for the sharp decline.

Maybe it had something to do with all the poor commentary emerging from Annual General Meeting season. Maybe it was disappointment with China's tepid manufacturing recovery. The widely followed Official PMI index moved above the all-important 50 threshold to 50.2 in October, signifying that China's manufacturing sector is once again expanding, but only just. And while the other manufacturing index, the HSBC PMI improved to 49.5, it's still showing a sector in contraction.

Or perhaps the sell-off had something to do with the Reserve Bank's release of September credit data, which showed annualised housing credit growth running at just 4.7%, the weakest growth rate since the series began in 1977. But if you annualise just the last three month's data, housing credit growth is at just 4%.

And then we got the news that the housing market 'recovery' might not be a recovery at all, as national house prices (on average) fell in September. Strong credit growth, supplemented with national income growth from the resources boom, has underpinned the 20 year housing bull market. It made a lot of people a lot of money.

But the income boost from the resources boom is over, and attitudes to debt have changed. That is, people no longer believe debt = wealth. So if you're hoping for a housing renaissance, forget it...it's not coming back for a looong time.

All those concerns hit the Australian stock market for six yesterday. Today the market opened higher but has spent all morning giving back those gains. So is the stock market forming a top, or consolidating for the next move up? Along with everyone else, we have no idea. The Aussie economy is clearly slowing down...and we think the stock market will fall. But what we expect to happen and what will happen might be entirely different.

For investors, this is one tough market. For speculators, it's more fun. Being a bit more fatalistic about your punts is a lot less stressful than worrying about your life savings. One man who loves a punt is Kris Sayce, editor of Australian Small Cap Investigator. This week, he tipped three small cap stocks set to benefit from the new digital age.

It's tough being a bull in a bear's den, but Saycey correctly called the bottom back in June...telling everyone it was a great time to buy stocks. He's still quietly confident, but not as bullish as he was back in June. We're probably more bearish now then we were back in June. The world's problems haven't gone away...it's just that the perception of the problems have changed.

Regards,

Greg Canavan
for The Daily Reckoning Australia