The Deal

Today, we saw a real doozy of a rally-no major index finished the day with less than a 3% gain. The NASDAQ 100 came in at 4.13%. Financials, by way of the XLF came in at 7%! Yesterday at 2pm I said this,

"Well, so far it is playing out as the charts suggested. It looks like we may see the afternoon pullback shortly, but this is looking more and more like a tradable move to the upside-bounce? Bear market rally? I don't know, just the indicators are improving."

And improve they did-we got that afternoon pullback too. In any case, a guess quite a few different things have come into play, probably the most important is the market's reaction to UBS and LEH news this am. UBS said this am that it expected to take a 19 Billion dollar write down in the 1st quarter and log a 12 billion loss to boot-THE MARKET LOVED IT! Can you imagine? No matter how many times I see this kind of action, it always makes me shake my head. On top of that DB-said they'd be looking at 3.9 Billion dollar write down and that conditions have become significantly more challenging the last few weeks. Again-THE MARKET LOVED IT!!! Just can't get enough huh?

Then Lehman struck a deal to raise 4 Billion in new capital that was dilutive for current share holders, problem? NO PROBLEM! In fact they bid the damn stock up $6.70 OR 17.8%!!!! Look fellas-if you have bad news to declare, today was the day to do it. There probably won't be another day like this in years. Not in terms of market strength, but in terms of forgiveness-or forgetfulness, or just plain madness. If you didn't have something truly horrible to say today, take GS for example, then you had to make do with a puny 7% gain instead of double digits! This is the way of the Bull.

Next up we had the "New Quarter Effect" in effect and anyone who may have sold some junk to get it off the books for the quarter, raced back in to buy it right back. New money poured in from the sidelines and as I said Friday am, there are enough decent looking charts out there and the averages have sustained a very orderly pullback near levels that would be ideal for launching an attack at their resistance levels, to breakout." And that's exactly what we saw today.

There was another clue to today's strength, here's another post from yesterday at 9:33, "
I was quite surprised to this morning's NYSE Advance/Decline line-it popped into the stratosphere. While the market opened down, more stocks were advancing then we've seen in days-this is a positive divergence and may be the precursor to a bounce." So there were plenty of signs if you knew where to look.

So, the market is in some sort of dementia right now-and that's fine, but really, even if we are near the end of the really ugly stuff-do the current valuations make sense? The S&P is only down a little less than 7% for the new year and is only down around 4% year to date. Imagine that, we were in an accelerating Bull market where everything was cream, home values were into the funny-zone and people were flush with cash from their second mortgages/equity and they were spending it. We are not too far from that point in time and space on the chart, but now people don't have cash, they are loosing their homes, jobs, and with that-families even. People aren't spending now and the outlook for the economy is nowhere near as enthusiastic as the market is today. Even if the liquidity crisis is put to rest, we are still looking at a stagflating economy. Is this the lofty perch that the next Bull shall emerge from? It doesn't make any sense and that is because there is a DISCONNECT. The market's valuations are nowhere close to the pessimism and emotional levels that the participants are feeling or have recently felt. If we were rallying today from the 1150 level (S&P) then it would all fit very nicely, but we aren't-we are just as close to all-time highs as we are from the level in which the valuations and reactions would make sense. The disconnect is in the multiple and by now notorious, famous or infamous (depending on your view) interceptions the Fed has orchestrated. MVP goes to Uncle (I'm not an interventionist) Ben.

So if you are a pure technician, it's a bit tough to get the big calls right, right now. Every time (about 4 times) we've been really close to the next big leg down, Uncle Benny steps in. You damn near need to be a magician. I use to be a believer in supply and demand and that was the prevailing force, however, I've had a change of heart. I'm a believer in "don't fight the Fed" now more than ever.

Moving forward-Follow through? Tomorrow? Hmmm....That's a concept this market has had real trouble with, in either direction. What is the Fed really up to? That is when you'll be able to answer questions about where this market is going. It seems like they want to be the heros and make a power-play, power-grab. The problem with that is-we need a crisis! We have a crisis, but if it is solved too quickly, the claim that "the market takes care of itself" will win the day, leaving the Fed with a loss. So, my guess is, this is just a brief moment in time-possibly a Bear Market rally. I'm not sure how election year politics plays into this-any opinions out there? Maybe the want to push the distaster off until after the elections? Or maybe it is important to make the disaster part of the voting process? Figure that out and you are one step closer. In either case, ultimately this thing has got to scare the crap out of people and that is usually done with a massive sell-off in the market-that really focuses attention. When people get scared, they'll give up anything to be pulled from their fear. Governments/Dictators the world over have known that for millenniums. So look for fear, then look for a loss of money and liberties following.

As for the market today, a couple of phrases come to mind: "Put some lipstick on that pig" or "Polish the turd"-both will do equally well. Yeah I'm feeling a little bit cantankerous today-so what?

No really, here are the price/volume relations:

DOW:

Stocks up on rising volume 21
Stocks up on declining volume 9

S&P:

Stocks up on rising volume 330
Stocks up on declining volume 157

NASDAQ 100

Stocks up on rising volume 72
Stocks up on declining volume 26

Russell 2k

Stocks up on rising volume 999
Stocks up on declining volume 678

All Stocks

Stocks up on rising volume 3154
Stocks up on declining volume 2061

Okay, so it's not as bad as I made it sound, but it surely isn't as strong as you'd expect. Really, it's all about Wednesday. If the market can follow through and breadth doesn't get any worse, then we could be looking at a pretty serious Bear market rally.





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