TERRIBLE SWIFT SWORD

Quite a week on Wall Street. The major rally from March 2009 lows now really appears to be over for good. I expect to see a final drop on the open tomorrow (also, CIT filed for Chapter 11 this morning, and premarket futures are trading negative), followed by a reversal upwards through the week. This small rally will not make new multi-month highs, and will probably top out at around 1054 on the SPX and will once again test 10,000 on the DJIA (target = 10,050). Expect to see the bulls crowing about how smart they are just as it tops out. It will be swift and strong, but will peak on low volume and not make a new high.

After that, the big downward move I've been expecting for most of the last year will finally be underway. The downside targets for this next leg down are below 4,000 on the DJIA, below 600 on the SPX. it's looking much more likely that we'll hit those levels during 2010 rather than later. At some point in the middle of this drop, we'll be looking at a 1929+ magnitude price crash event.

This week should give me plenty of new data to refine the probabilities, so I'll create a new macro-scale prediction chart next weekend (like the one I did almost a year ago which predicted the big rally).

In other markets, the US Dollar looks like it finally bottomed out and is back on the upswing. This nascent rally is still consolidating, though, so I'd expect to see it retest support while the equity markets are having their little mini-rally this week. If USD shows strength while that's going on, then it's uptrend move will be even bigger than I expect (and I expect it to move up a LOT during the next 12 months: upside target on the USD index is 120+).

Gold made some spectacular new highs in October, but has since been showing considerable weakness. It looks to me like it's going to have another spike up to a new high, and then go into sharp reversal along with the broader markets. Downside target for gold next year or 2011 is below $680/oz spot. At that price point, I intend to convert as much cash I can lay my hands on into gold coins. Until then, I wouldn't touch gold with a ten-foot cattle prod.

Treasury rates look like they're going to make an upswing again as bond prices fall. VIX is already shooting up and is likely to make a new all-time high in the coming months. Everything except the USD is getting tightly correlated and showing signficant weakness. That's one of the reasons I think we're going to see a major crash in the next few months. That the underlying volatility is coming into line with the psychological progression simply reinforces my long-term outlook.

I'm still all-in short. After a little rebalancing to increase my position against CRE (which is going to implode very soon, kids...and the losses are going to be even bigger than I first thought), I have what I consider a very solid position ready to capitalize on what I think is coming. Moody's CRE index is now down more than 40% and dropping like a stone, which already implies an unrealized loss of more than $2 trillion on the books of CRE lenders (for comparison, Sub-Prime hit them with a paltry $1 trillion loss). Their total exposure to CRE is estimated to be over $4 trillion. That doesn't even count the multi-trillion-dollar derivatives mess that has been slowly putrefying over the last two years and is set to turn corrosively toxic as soon as the CRE worm turns. Our entire banking system is therefore insolvent and about to collapse. It's still not too late to pull some cash out of your bank and squirrel it away in a safe place. It won't be a whole lot longer until I can't say that anymore. If you rely on credit cards to make most of your purchases...even debit cards...you really need to figure out a way to buy stuff without them in a pinch. If I actually owned any stock, I'd sell every share this week. Fortunately for me, I don't.

My current at-risk portfolio (not counting my cash safety net) looks like this:

76% in DXD at $32.60/share avg.
24% in SRS at $9.84/share avg.

Happy investing, and be careful out there. We live in interesting times.

Dow 10,000!! We're saved!

Or not, as the case may be.

The equities markets seem to have shifted in to full-blown melt-up/blow-off mode, with impending bear capitulation dead ahead. Could the Dow make it north of 11,000 on a blow-off? Sure. But this is still not a "V-shaped recovery." It's a rally within a much larger secular bear market. You can't look at the relative strength indicators, volume, put-call ratios, advance-declines, price-to-earnings ratios, or whatever and seriously think it's anything else. Even the bulls admit there isn't much by way of fundamental reasons for stocks to be making the gains they've made.

Nor is it likely to last long. I'd say the end of 2009Q4 at the most. Blow-offs are sharp, but rarely sustained. When it turns, it's going to turn fast and deep, like someone kicked the chair out from under it. Actually, if you look at all the economic fundamentals, the chair has been missing for some time now. The market is simply doing one of those Wile E. Coyote running hang times over the canyon and hasn't yet realized that the Roadrunner led it into a trap.

Keep your eye on corporate bonds for a telegraph of reversals. LQD (a good proxy measure) has already been on the downswing for two weeks, giving a significant non-confirmation in equities, but it hasn't closed below 103 yet. If it does, especially while equities are making new highs on declining volumes, be very, very careful being long equities.

And I still think the US Dollar is close to bottoming out even though by all appearances the international competitive devaluation is on full blast. Sentiment is as negative as I've ever seen it on a higher low, DXY is ridiculously oversold, and the dollar bears are fully committed. SPY and DXY may be saying "inflation", but the bond markets are still saying "deflation" (checked the yield curve lately?). Since 2007, every time they disagree like that, bonds win.

I'm still short, and taking a beating because of it (my portfolio is now dead even with where I started in 2007...sigh). Nobody said this was easy, and I never said I don't make mistakes.

The DJIA broke into a new rally high (above 9918) about and hour and half ago. Clearly, I called the end of the rally too early. It looks like I'm going to get the push to 10,000-plus after all, and probably the Time and Newsweek covers too.

The up-moves are showing incredible weakness on volume, though, so I really don't expect this to last much longer at all.

I've also started building a significant short position on real estate.

By the way, in case anyone was wondering, my short position on the DJIA is still in place at 200% via DXD and RYCWX (averaged at an index level of 9,620). It is unhedged, and I have no stops in place (primarily because I've been expecting volatility to increase dramatically, along with whipsaws, bear squeezes, and other nonsense and do not want to get stopped out by the automated systems and traders as they run the stops.

I may be wrong about what I think's going to happen with the market, but I put my money where my mouth is.

Things are getting interesting again.

Hrm.

Seems like Gold is going to make a blow-off after all (at the moment, it's in new high territory intra-day...we'll see if we get a new high close). I suspect it will not be long-lived. The fundamentals are so negative that the only thing that could support it is pure, unadulterated euphoria. Downside target on Gold is still $680/oz.

We may also still get that last run at 10,000 in the DJIA, too.

But, honestly, looking at the psychology of the current moves in the Dow and USD, they have all the hallmarks of initial counter-trend rallies in newly established trends: the previous trend psychology has re-established itself to a new extreme on lower price levels, weaker fundamentals, and declining trading volume. That screams "corrective rallly". Also, the suspicious trading activity (for instance, yesterday's exact nailing of the VWAP on automated trading...LOL Goldman Sachs) we've been seeing argues that soembody is trying to prop the market up. All such efforts are inevitably doomed to fail.

The question with regard to the Dow, then, is what phase of counter-trend rally are we looking at? Is this a smaller rally within the larger down trend I claimed started a week and half ago? Or is it a final blow-off leg of the big counter-trend rally which commenced back in March? Only time will tell. If the Dow goes above 9918, then the former looks a whole lot less likely than the latter. In that case, I'd expect a rapid push over 10,000, with much euphoria and those Newsweek and Time covers I was looking for. It won't be long-lived though, and will show considerable stuctural weakness.

If the Dow can't manage to get above 9918, then the probable case is what I have already argued: the rally is over and we're on an express elevator for the basement.

Red October looks like it’s back, but it remains to be seen how much (if any) blood will flow as the rally euphoria dissipates.  The market has been down for a week now, but in an epileptic fit that has not decisively confirmed that the rally is over for sure (as I write this, the DJIA just ticked under a price high established four weeks ago, so I may get that confirmation soon).  It still looks a lot more like the Slope of Hope than the Wall of Worry. 

I’m still 200% short, and that position is already in the black, but I’m watching it closely.

I finally got some of the headlines I was looking for, very close on the heels of last Thursday’s intraday top, and true to counter-correction rally style, they were ebullient but nervous…sort of like a man whistling past the graveyard while he ignores the pains in his chest.

The New York Times business section on Tuesday (9/29) was dominated by a “Dow 10,000?” graphic and the sub-lede “Creeping up to 5 Digits Yet Again” and a picture of laughing traders on the floor of the NYSE with their hands up in celebration (or making a bid? hard to be sure).   The text of the article is much more subdued in tone, but nobody reads that stuff anyway.

The business section of the Seattle Times today leads with “Northwest Stocks Shine” and notes “Gains Impressive.”  Indeed, stocks of companies based in the Pacific Northwest have outperformed the indexes over the last six months, but that doesn’t mean a whole lot.  Hesitancy and fear have taken hold in the markets, though, and despite the article’s positive spin and large picture of happy floor traders, the text contains a lot of uncertainty for the future.

I haven’t got a Newsweek or Time magazine cover signal yet, and maybe we won’t get one since the big rally wasn’t a major trend turning point but a counter-trend move.  Time has been running a lot of minor positive spin articles, but not major headlines.  I was expecting the headline, and the lack of it makes me a little nervous.

Deflationary psychology seems to have locked itself in place while nobody was looking.  Savings rates are way up.  Also in the Times: people in India(!) are cashing in their gold jewelry to get rid of debt.  The bond market is pricing in major deflation, even as equities have been making their rapid gains.  The US Dollar is still showing significant strength and bear exhaustion even as the Fed is actively trying to kill it in FX.  If I was a betting man, I’d say that the flaming wreck of the carry trade will become one of the big stories of 2010-11.  I just wish I knew how to take a low-downside-risk short on that.

It also looks a lot like copper is being set up to take a monumental fall, but I don’t have much more than a gut feeling to back that one up.

I feel a disturbance in the force, padawan, as if millions of investors poring over the latest FOMC report suddenly cried out in pain as their optimism was silenced.

The destructo-ray from the Death Star was, of course, the Sith Lords at the Fed letting all the parasites on Wall Street know that the money spigot was going to be turned down in 2009Q4 (or, at least, this is the rationalization on the street...I know better).

I'll make a bold prediction: the rally is over and the top is in as of today, probability 90% plus (mitigated only by the fact that it didn't break a new intraweek low...yet). The big ride down, which may take as much as three years to complete, is underway. The S&P and dow were both off 2% from their intraday highs and gapped lower on the close. That's not a bullish sign. The US Dollar Index, after briefly popping down to 75.97 as equities made a very brief 2009 high, rebounded sharply upwards by a similar percentage. Gold tanked along with equities. Oil seemed to presage them all, opening sharply lower and remaining flat while the rest convulsed.

All my targets got hit, and rung like bells as the markets reversed hard away from them.

Obviously, if we get a new 2009 high in DJIA, then I'm wrong. But my confidence level went way up after watching the markets flail around this afternoon.

Darth Reich must be finding my lack of faith ... disturbing.

Friday's triple-witching was kind of a non-event. The last couple of trading days look a lot like the savvy traders running the stops in anticipation of the FOMC report issuance tomorrow. A lot of day traders got whipsawed, especially in FX, and after a little volatility on the open, the market plateaued in a very narrow range later in the day.

I can't decide if the rally is officially over, or if it's got one last push left in it. I'm currently favoring the latter scenario, but I didn't get a confirmation today. Any break above 9855 confirms that the rally has some more upside left in it and is likely to make a run at 10,000. I expect it to play itself out in the next 4-5 trading days (or maybe less...we could easily see a top before the end of this week if last Thursday wasn't it), with a test of 10,000 on the DJIA, and then reverse into the next major down move. Of course, I'm not so hot with the timing even though I've been hitting the directional patterns fairly well. The rally could continue for months or end today, but that doesn't change my position that this is not a recovery or new bull market, but a counter-trend corrective rally in a much larger bear market. My confidence level on that is very, very high, and when the markets turn back downward, there will be a lot of force behind them.

The rally moved up so hard and so fast that there isn't a lot of price support shoring up the market if things reverse in any significant way (what the technical guys call "air pockets"). The equities markets will all make new lows, probably by substantial margins. The only significant question in my mind now is "when?" Will it it be as soon as 2010Q1 or push out for more than a year? I wish I knew.

I'm now 150% short and looking for one last spike up to sell in order to go to a full 200% short position.

Also, for those who are interested in things urban, I have created a new blog: Seattle Urbanism

The rally is still proceeding apace, but it's starting to look very tired. Significant psychological milestones are piling up. Bernanke has announced that the recession is over. Television news shows are runninng market tracking and investment segments again, cheering up days as loudly as they did near the top. A broad consensus of economists holds that recovery is immanent throughout the economy. Optimism is running rampant. Advance/Decline ratios are showing 90%-plus bull commitment. P/E ratios have hit their highest levels ever. Mutual fund cash-to-asset ratios are below 5 percent again. Dividend yields are back below 3 percent. The Big Bull psychology has re-established itself with a vengeance, even though every possible measure of economic vitality is negative. All that's missing is the final blow-off into a euphoric spike marked by front-page news about how we're all saved and the buy-and-hold crowd has been vindicated.

That could happen literally any day now, although I'm thinking at this point a final push over 10,000 in the DJIA is still in the works. I'm 50% short and selling the spikes.

I'm getting "sell" signals across the board in every market I track except the US Dollar, which looks very much like it's about to bottom out around 76.0. USD bulls have utterly capitulated to a level not seen in years. Bearish sentiment is approaching historic levels...those typically associated with major bottoms. I know this is contrary to everything most of you are thinking about the future of the dollar, but bet against the greenback right now at your peril. We're about to get at least a year of very severe dollar deflation, probably starting in Q42009. The USD index will make a new interim high, and could easily crack 110. Cash in your mattress is about to become a viable profit strategy.

The Gold market appears to be the last hold-out of the commodity bubble, probably because it didn't participate in the blow-off to the same extent as the other commodiities and has substantially lagged oil (which has had a weak rally and looks ready to take another dive). We may get a last blow-off in gold as well, but the gold-bugs seem to be losing their momentum. I'm not ruling out the possibility that Gold will be the very last of the Great Asset Bubbles, but that seems much less likely now than it did several months ago. Gold may crack its all-time high of $1035 before reversing, but reverse it will. A downside price range of $600/oz or less is not out of the question. Silver has either already topped or is about to do so.

We live in interesting times. If you have any debt, you'll want to get rid as much of it as you can manage as soon as you can. Owing money in a deflationary spiral is doubly painful.

I am now convinced that the DJIA is going to get close to or even go over 10,000 in the near term, fulfilling the prediction I made several months ago. I would not be at all surprised to see a big upward spike in the next week or two as we get a final blow-off to terminate this rally. The building excitement and reinstatement of euphoria is getting palpable, but doesn't seem to have peaked yet.

However, having said that, it's now cracked into the range at which it could make a significant top at any time (9,520+). So, I've started rebuilding my short position as of last Friday, August 21st. From now through the next year or three, I'm going to be "selling the spikes" (as opposed to "buying the troughs" as recommended by the thieves on Wall Street).

Current Position: 20% short (via DXD)

I'm going to start rebuilding my short position at DJIA 9520+.

I seem to have lapsed into a once-every-two-months-or-so update schedule on these, not because I've forgotten about it, but because I haven't been seeing much that necessitates more regular updates. The market's psychology is progressing pretty much exactly as I predicted back in January, although with less price magnitude and more time magnitude than I expected. Those variances are likely due to massive government intervention in the capital markets. As I mentioned in the last update, there's a frontier of diminishing returns on that sort of thing. They are merely prolonging the inevitable and very probably making the ulitmate outcome much worse than it would otherwise have been.

At any rate, here's the updated chart:



At the point of the last update, in May, I was projecting that we were nearing the end of the first major rally leg and would be moving into a a counter-trend correction soon. In fact, the counter-trend move began the next day (or perhaps three weeks later, depending on how you look at it). However, it took a much more sideways-oriented form than I expected and did not drop to the deeper low I projected. This is a repeat of the same phenomenon dropping into the major low we say back in March, and says to me that A) the government is manipulating the markets (hah! big surprise there), and B) the bubble psychology that drove the bull market in the 1990s and early Aughts is a long, long way from being fully corrected. In other words, my longer-term outlook is getting more pessimistic even as the markets seem to be bouncing back.

As for where we are now, the last two weeks saw a powerful move to the upside with dramatically increasing optimism and excitement in the markets. The euphoria hasn't kicked back in yet, but it will over the next few weeks, at which point we should see the broader markets reverse, HARD. This coming fall and spring are likely to be very depressing for market bulls.

We didn't quite get a "Nope, It's the Apocalypse" moment during the recent rally correction, but the rally peak should certainly provide us with a chorus of "We're Saved!" headlines in August and perhaps September. The Buy-and-Hold crowd will be crowing about how smart they are. That will be your (and my) cue to start shorting the markets to the limit of your comfort zone.

As of this week, we made it into the upside price target range for this rally (DJIA 9,000 to 11,000 as predicted). That means the rally could end literally any day now (and is the main reason why I'm posting this update). However, I think it's still got some legs and won't buck the trend just yet.

I'm still neutral (have been for months now, actually). Looking to go at least 200% short using ETFs as the rally ends in a sort of "Sell and Hold" position that will take me through at least the next year, and possibly next decade.

[I'm also going to be creating a new chart soon, since this one's almost filled up. I've been continuing to use the old one for visual continuity's sake and so I can be answerable to the rightness or wrongness of my past predictions. They'll still be available in the old posts for reference.]

It's been awhile since I've done a market update. Since my last one, about two months ago, the markets have made a major reversal as projected, but did not first drop to as deep a low as expected first. Looking back at it, I think this is probably due to market and currency manipulation by the government. Since there is a frontier of diminishing returns on that sort of thing, I don't expect it to last.

The headline in the Seattle Times this morning is "Is recession coming to an end?" and the DJIA has broken significant resistance to the upside in the last couple of days. Sharp-eyed readers will remember that one of the psychological waypoints I was looking for was a broad pause for breath in which the markets ask themselves "Are we saved?". Odds are good we just hit that point or are very close to it. Next up, a correction within the corrective rally that takes us for a little gut-wrenching ride down before resuming the tail end of the rally.

When Time or Newsweek prints a cover with some variation on "We're Saved!", the overall rally is over or nearly so. Then get ready for a big, multi-month or even multi-year drop.

Anyway, here's an updated chart, taking my earlier projection and showing where we've been since then.



Note that we got a complete psychological progression into the March low, but its price magnitude was abbreviated. Actually, I think that's likely to be a very negative indicator in the long run, but only time will tell. I'm still looking for DJIA 9,000 to 11,000 for the next significant top.

Anybody out there in Eljay Land know anything about MS Sharepoint? I'm trying to set up some internal web sites on our company intranet for project management, and feel like I'm beating my head against a wall.

And...in b4 "dump sharepoint and go with something else." Not an option here. I have to work with what I've got.

Any of you have a Dreamwidth invite you'd be willing to email me?

Another tax day has come and gone, and I greeted the occasion with indifference.

It's not that I didn't want to attend the local Tea Party protest. I did, if for no other reason than to be entertained for a few hours and measure the liver of the crowd. Is the US middle class finally wising up to how badly they've been played for the last eighty years? Frankly, I doubt it.

Unfortunately, I had to teach so I missed it.

Nor am I all worked up about my tax bill or the herculean effort of figuring out how to comply with US tax law every year. I hire an accountant to do that for me, and as usual his efforts paid for themselves several times over. If you've never had a real professional give your tax forms a work-over, I highly recommend it. Worth every penny I paid him, and then some.

I don't even get especially exasperated by the gross inequity inherent to our taxation system. Every civilization requires some form of pay-to-play to function. The income tax is ours (partly), and it's not fundamentally any more arbitrary or ridiculous or destructive to property rights than any others.

Some may find it curious that I get much more foaming-at-the-mouth outraged about daylight saving time than I do about the income tax. Let me explain.

I won't go into the DST thing at length since I've done so elsewhere. Let it suffice to say that what offends me most about it is the blatant Orwellian nature of the whole thing, impacting a core aspect of our daily lives for essentially trivial reasons. It uses a ten-megaton mind-control nuke to affect a pointless change simply as an academic exercise in mass mind control. And it makes hundreds of millions of people tired and annoyed in the bargain. Feh.

The taxation thing though...it strikes me that most people who are so outraged by the way our income tax system works fall into one of three categories (or all simultaneously):

A) Their opinions are colored by envy, manifesting in outrage that somebody else is getting a perceived special privilege (whoever that might be. This is often cloaked in the language of egalitarianism and class conflict.

B) They are stuck in the teenager's solipsistic perspective in which they cannot comprehend their actual obligations to their own civilization, manifesting in outrage that somebody might dare to arrogate themselves the power to come into their room and touch their stuff ^H^H^H^H take money that rightfully belongs to them. This is often framed in the language of lilbertarianism.

C) They utterly fail to understand how government finance works in a fiat currency regime. This is usually framed in the language of fiscal conservatism, in which the government's finances and our family checkbook are unreasonably conflated, and much anger expressed over using our national pin money to pay for hookers and blow or Kennedy rehab ensues.

The first two...well if the shoe fits I can't do much to talk you out of it any more than I could convince the Pope to renounce the Holy and Catholic Church. Purging your mind of either of those wrong-headed belief systems is a personal journey, and weaning oneself from treasured security blankets is a painful process.

The third, however, can be partly addressed by a little education (and also provides an explanation for why I think so-called "fiscal conservatives" are dupes).

I'll keep this simple. The government's finances don't work like your family checkbook because you can't print your own money at will, and the government can. That's one reason why it's a sovereign, and you're not (another being that it has no recourse to higher authority, and you do). If you want to buy groceries, you can't just whip up a few hundred-dollar bills with Grandma's picture on them on your color printer and take them down to Safeway. Different rules apply to sovereigns than to puny individuals like you or me, and this is particularly true when a sovereign gets into the dodgy business of creating fiat (literally "let there be"...alluding to creation by word command alone) money.

When a sovereign with its own fiat currency wants to pay for something, all it has to do it print up the money. It needs no other revenue source, so long as it can get others to accept the currency as a valid form of money in the first place. This is as true of the United States Federal Government (henceforth, "Fed.gov") as it is of any sovereign that has a fiat currency. Fed.gov could pay all of its bills on a day to day basis without ever collecting a dime in tax "revenue" and never once face bankruptcy. Try that when you pay your utility bills. I dare you.

Of course, the problem with Fed.gov doing exactly that is it creates massive inflationary dilution of the supply of its currency, devaluing all the existing units of that currency in proportion to all the new ones that get created as it pays its bills. Inflationary dilution of value then reduces the willingness of others to accept that currency in payment, and the system breaks down.

A taxation system directly addresses this problem in two ways.

On one hand, forcing everybody to pay taxes creates large, ongoing financial obligations from everybody to Fed.gov in direct proportion to whatever is being taxed (which, more and more, is everything). Fed.gov demands that these obligations be paid in units of its fiat currency only. Just try paying the IRS in chickens, or even gold bullion, and see how far you get...though you'll still have to pay tax (in USD) on the chickens-to-gold barter transaction. Hence, taxation creates a large structural demand for the fiat currency.

If you refuse to pay your taxes, or refuse to pay them in the fiat currency, angry men in uniforms with guns come to your house, shoot your dog, and throw you in jail. For this reason, I describe the system used to back our monetary system as the "Hot Lead Standard" and it trumps old-fashioned gold standard currencies in a crude but effective way.

On the other hand, when Fed.gov collects all those fiat currency dollars we pay in taxes, it takes them out of circulation and reduces the overall inflationary pressure generated by paying for all the hookers and blow our economy needs with federal spending. This is especially important when a fiat monetary system is combined with a fractional reserve bank credit system (as ours is). Fractional reserve lending means that banks are allowed by law to lend out most of the money they take in as demand deposits (your paycheck deposited in your checking account, for instance) and then lends most of it to buy Florida swampland on a 30-year payback plan.

Fractional reserve credit transfers some of Fed.gov's power to make new money to anybody who creates credit. For every dollar Fed.gov prints, nine other credit "dollars" are magically created from fractional reserve lending down the line. This allows some plausible deniability on the part of politicians who are engaging in massive inflationary spending to build patronage networks, and makes bankers happy...most of the time.

It works this way because when I depost $100 in my checking account, the bank then lends $90 to, say, Bernie Madoff (not that he needed it, mind you, having found his own government-style financing scheme), who uses it to buy a pair of cashmere pants. The seller of cashmere pants then deposits the $90 in his own checking account, and 90% of it is loaned out again...ad infinitum. This is how one dollar magically transmutes into in approximately $10 through the power of credit.

So fractional reserve lending increases the amount of inflation in the system by...well...A LOT. The more inflation there is, the less willing people will be to accept the fiat currency in payment for anything (LOL Zimbabwe). That undermines Fed.gov's power by undermining its fiat currency, since the government can loudly proclaim the value of its dollars all it wants, but it means nothing if people will only use them for toilet paper.

Income taxes help control credit inflation. Fractional reserve lending rolls over the procedes from every credit-based transaction back into more credit. Income tax (and sales tax) is charged on every transaction, taking away some of the new money and reducing inflationary pressure. In fact, an income tax reduces the amount of inflation in the system from fractional reserve credit by more than half. This is usually a good thing.

The bad part of it is that it's typically not the banks and borrowers who are having their money destroyed to keep a lid on inflation. It's people who make an actual...you know...income. Which is why I'm happy to pay as little tax as I can manage, and reward my accountant handsomely for facilitating that desire.

It looks like we're in that rally I mentioned last week (I missed the start of it by 3 days...mea culpa). It's already bumped up nearly to the range expected, and may run out of steam soon. Expect a push in the DJIA to 7400 to 7500 and then a reversal. The reversal may not be long-lived, since we're in a significant psychological support range now (between 6350 and 7800 or so). The probability that we see some significant sideways bouncing bounded in this range is high.

I still think we're going to see one more significant drop for the multi-month rally back to 9000+ I expect through the rest of the year gets rolling. Downside target for that drop is still below 6000 and maybe as low as 3750, though I now think we'll most likely see it rebound hard in the 5000s.

The larger downtrend psychological pattern for this phase is not yet complete, though, even though it's in its last stages. This rally has been strong, but I don't think it's got huge amounts of upside left in it.

Having said that, though, this analysis predicts at least a week of further sideways volatililty with some significant rallies within it. For that reason, I'm now neutral. My trading strategy loses me money if I wind up in a volatile sideways pattern (it cost me big during November/December 2008, as you might recall) I expect to go short again soon, but not until I see some indications that the rally is done.

As for the discussions now being held in DC about re-instituting the Uptick Rule for shorts, I have only one comment: "Idiots."

Blaming shorts for a bear market is nuts, and shows a profound ignorance of how markets work. The short sellers have been providing lots of needed liquidity and allowing the markets to make some attempt at pricing all the crazy uncertainty going around. The short sellers have also been forcing exposure of fraudulent and bankrupt companies in an orderly fashion. Without the short sellers, we'd be seeing more downward price gaps, crashes on surprise news events, and "AM Limit Down" days in futures. No sensible share trader or share owner really wants those things, even if they are underwater and being pressured.

The Uptick Rule itself doesn't have much impact on short sellers, but negligent CEOs and opportunistic politicians are looking for scapegoats right now. If they go beyond simply re-instituting the Uptick Rule and start drastically limiting short selling, the markets will be a in a world of hurt.

The market looks like it's working itself up for another big drop. Watch out.