Remember never forget the power of greed and fear, and the propensity for investors wanting to own stocks (taking long-side) and fund managers chasing performance as we saw today especially if they think the bull-train is pulling away they will want to hop on board.  Please, remember when in doubt as to market conditions/direction CASH is always king (or queen depending on your gender J ) please trade cautiously and be quick to protect your profits. I’m guessing that this the days ahead we will become embroiled in a major bull-bear battle as we head into the end of earnings-season and the start of the confessional period.

Strap-yourselves, as it is sure to be another wild another wild rollercoaster ride!! especially during as this week is the heart of earnings reports!   The question is do you want a ticket to embark on this amusement ride...I expect volatility will be quite high and we will have many bouts of pops and drops...and a trader or investor that is not nimble or willing to correct with the market-flows and ebbs could lose a few fingers or become a proverbial bag-holder!      Currently the trend is down, and the selling has been on significant volume...but that could quickly change as the dip buyers may emerge with the onset of a short-squeeze, or the bad-news bears could taste blood and grind the bulls into chuck....so until key levels are breeched to one side ort he other I'm recommending to my passive folks to remain on hold (sit on your hands...(see technical section below)....remember these quant-programs are great at developing head-fakes!

For this week on a technical basis I have been forced (against my better judgment) to change my bias to Neutral to slightly bullish as we head into options “X” week as the daily charts are starting to turn up….however in the near-term the 240/180/120/60 minute charts are very overbought…as I research the fundamentals (I remain bearish) when I look at charts on each stock I have profiled on the Alert-Pages and Swing-Trade suggestion list plus hundreds more that never make it onto these pages. I have reviewed over 200 charts that display rising wedges and potential “W” formations on their near-term charts (as I have shown in our real time trading room)…and as such we have a massive wave of divergent market disconnect brewing and I had to remind myself many times that each chart displaying bullish patterns were actually just proverbial bear market bounces until real overhead resistance was pierced on decent volume and not just manipulative actions from the huge prop-trading desks of the likes of (GS, MS, BAC, JPM etc.) the commodity charts appear to be the moist bullish, are they forecasting a dollar retracement or something else, as when I look at PCU, FCX, POT, MON, MOS, GOLD, AEM, GDL even AA, and the energy stocks XOM, COP, USO, HES, OXY they appear bullish on the near-term charts and the daily-charts as do the major indexes on the daily charts!  

When considering the outlook for trading this shortened options “X” week I kept coming back to two nagging concerns that I have as there is no real compelling reason to step up to the plate by funds and smart-money investors to buy stocks right now (just reflect back on the plethora of negative fundamental and supply issues I have written about during the past several weeks in my writings I will not bore you by repeating them as they are archived below). Any one of them *especially the bond issues* could tank our markets severely for several days/weeks without any warning. Then I have to reflect on the fact that the markets like I am are fully aware of these potential massive contagions and has failed to complete the sell off (the retracement of 33% that I have been expecting (maybe as deep as 50%) that started on January 20^th; as four weeks have passed as we started this decline and for some strange reason market participants are either numb or really have ignored these contagions as we have for the most part quit declining this past week (was this just due to pre-options X unwinding of massive index options or an reflective relief rally in what I believe will be a 5-wave pattern down). The markets held up despite negative economic news dozens of earnings misses and lower guidance, multiple sovereign debt contagions, awful bond-auctions, geopolitical concerns in Iran, etc. so I hope this is just not a massive-smoke-screen of deception by the stock market fairy godmothers  ** who was buying these past 2-Friday’s**!

So when the indexes stabilize and the talking buttheads on bubblevision start to use these points as bullish ammo it is time to pay attention for a possible change (near-term) in market sentiment. The Russell 2000, the Transports and the Semi/chip sectors all considered broad based signs for market health did quite well this past week and as I have always stated if small/mid caps are finding buying interest by fund managers it forecasts that they are either drunk *grin* or are confident the worst is over. I always watch the transports and they are rebounding as investors are seem to confident about the economic future (then on the flip side I as is this just an over sold relief rally…what has changed…in the transports the biggest juice has come from a massive short squeeze in the airlines….and I find this very troubling that airlines are the leaders). Historically Semi and Chip stocks are supposed to lead the technology stocks out of any market weakness (INTC, BRCM and the SMH) appear to be doing just that. The energy sector and oil services stocks this past week were also stronger than I expected on renewed demand expectations despite China's move on Friday very strange divergence as I expected huge selling and it did not materialize.

A negative for the markets factor continues to be the poor trading in the financial complex; as this sector posted a loss last week. The prospect of debt defaults, new regulation and new taxes on banks is proving to be a very strong headwind for them to fight through. We saw this past week that the largest to big to fail banks have $176 billion in exposure to the four weakest European countries; and according to Barclays Capital, 73 banks have $82 billion in exposure to Ireland, $68 billion to Spain, $18 billion to Greece and $8 billion to Portugal; the PIGS, Barclays said the actual risk was limited because the majority of the loans were low-risk collateralized transactions. Also weighing on the banks was a warning by Elizabeth Warren, the Chairman of the TARP oversight committee. She warned on Thursday that commercial real estate loans have the potential to wreck the U.S. economy unless regulators prepare now for the coming onslaught of defaults…wow CNBC didn’t cover these comments in force did they….She stated that between 2010-2014 about $1.5 trillion in commercial real estate loans will reach the end of their terms and nearly 55% are currently significantly underwater something I have been writing about for over a year now. Its simple economic 101 as weaker economic conditions and tighter lending standards mean that borrowers can't refinance at affordable rates and “hundreds” of banks that have made these loans could fail and the economy would surely suffer as a result. Warren on a conference call stated that “There is a serious problem coming and it will hit an already weakened financial system.” Small and midsized banks are going to bear the brunt of these bad loans. The panel found that nearly 3,000 banks have concentrations in commercial real estate loans including 2,115 banks with only $100 million to $1 billion in total assets…a perfect storm for them (wow a perfect storm for the FDIC as well). The panel also said many small banks should be allowed to fail. “The panel is clear that government cannot and should not keep every bank afloat. Neither should it turn a blind eye to the dangers of unnecessary bank failures and the impact on communities.” 

• As such I believe it will be extremely hard for the indexes to rally far with this nasty storm cloud (could turn into a tornado) hanging over the economy. Unfortunately this is a longer-term contagion that will not be resolved over the next several weeks/months and as such will not even be on traders/investors radar’s….If you can't see it today and it is not impacting your wallet today then it is out of sight and out of mind…so its likely not going to have near-term market weight.

For the banking sectors and for the economy this is like a cancer eating away at primary organs. Its important to not that the broader markets rarely rally for more than a few days if financials are not a part of the bullish move. AS in people, cancers are not always very evident on the surface and take a long time to manifest into a problem large enough to be recognized and treated. Normally by the time that happens the treatment is far from pleasant and in some cases the cure is worse than the disease itself as will be the case in my opinion for the financial sector. The average investor unfortunately does not really understand the implications of my current list of what I call major-contagions. Most are just tired of hearing about them and they want to get on with their lives and anyone talking about a recovery is embraced. Traders are longing for the instant gratification of a V bottom recovery (they do not want to entertain the idea of a “W” or worse yet an “L” and they are ignoring the long-term negative implications of the worst recession since the great depression.  

The pro forma labor department U6 unemployment rate is 17% or roughly 25 million Americans (I’m carrying figures that show its closer to 31 million Americans); it could take 3-6 years for jobs to return to even normal levels if we had a robust recovery underway; which is surely note the case. Real estate prices could take years to recover as evidenced by the various data….there are four million projected foreclosures in 2010 and more in 2010….we have a massive Option ARM reset taking place this year lasting through 2011 and is going to add another massive Tsunami wave of housing related problems into the economy….I could go on and on but I’m guessing by now you get the picture.  

The herd after feasting on locoweed for so log is addicted as everyone still expects desires and demands the instant gratification of a rally even when there is no justification for such…one reason I guessing for the near-term resiliency in the markets. The question I have been pondering is this relentless giddy sentiment enough to produce another significant rally, I an expecting not…..but it seems like every day that passes brings some new nasty contagions causing some wild whipsawing in the markets a huge pike in volatility but the impact so far has just been temporary.   Hence my perplexing outlook this week as I’m still in the bearish camp due to the underlying premise “why buy here” between the murky and unknown 2009Q4 and 2010Q1earnings cycle… I like to watch money flows very carefully and we saw that the early January rally in stock funds resulted in net inflows of only $2.7 billion for the entire month; there were heavy inflows early in the month but also heavy outflows late in the month. Equity ETFs saw $16.7 billion withdrawn in January. That was a 4.8% drop from the December levels. The Spider “SPY” ETF had $15.1 billion in outflows according to Morningstar on Friday. This isn’t very healthy overall for the indexes.

The charts (investors voting with real money) look like they want to break through resistance and rally because the emotional bias of the markets is normally bullish (ratio of 85:15) when I put on my bearish glasses I likely see a multitude of head-fakes on light to moderate volume at best and potential failures at significant over head resistance in the very same charts. The strong performance of the Russell-2000, Transports and Semiconductors; has pushed me into the slightly bullish camp this weekend (could be an options X development). Unfortunately these charts don't make up the entire landscape (but they are the leading sectors and indicators and are starting to portray a confirmation of a reversal). For several days/week as such we need to remain patient and let the market show us where it is going rather than trying to force it into our path (I do not have the bankroll to create such a push). There will be plenty of time to enter for swing-trades, option trades and longer term trades, and we do not have to act like proverbial piglets and have to be first in line at the buffet table (volume has been moderate over the past three days and this was the first late week cycle that we did not see volume spike, and the reasons could be many….since it was Friday before expiration and before a long weekend you would have expected an increase in volume given the rebound in the Dow from a -160 I was actually shocked to see a lackluster volume day when I returned home as normally a strong rebound produces strong volume.  

So I’m taking the best course of action I can….I will trade only what the market give me and will be patient, and wait for a developing trend!

Our major indexes were stricken early on this week by the contagions of the European-Union [Greece, the PIGS and Piglets] then on Friday China became a new and looming contagion for the markets, and they surely started off with a very negative tone on Friday.  

On Friday China's central bank surprised the markets by saying it was raising banks' reserve requirements by 50 basis points, effective February 25, this is the second such increase this year. The move, which comes ahead of a week-long holiday in China, has wide market implications but on Friday they seemed to be ignored, never the less our greenback and the euro as well as bonds jumped broadly while stocks dropped initially. As most in the game on Friday had not expected such a quick increase in reserve requirements by the People's Bank of China, given annual consumer inflation in January moderated to 1.5% from 1.9% in December. The central bank has injected about 604 billion yuan ($89 billion) in its open market operations in the past three weeks alone and this includes the impact of a punitive reserve ratio hike for selected banks just last month. Its important to note that about 686 billion yuan ($100-billion) in central bank bills are due to mature in March, this is up sharply from about 310 billion yuan ($46-billion) in February, and will no doubt put extra pressure on the PBOC to mop up this mountain of free and easy money.

Early on this action spooked the financial markets and sent commodities initially crashing on concerns that China was really going to slow growth. The move by China is another endeavor to slow the ballooning loan activity, which has started off with a bang this year.  Banks in China loaned 1.39 trillion yuan ($210-billion) in January the third largest monthly total on record…their economy is over-heating as last year their bank loans a record of 9.6 trillion ($1.5-trillion) in loans. These new reserve requirements basically means that their banks will have to keep 16.5% of their assets in reserve at the central bank, so this 50 basis point hike will remove about 300-310 billion yuan from circulation and this will start to spook commodity players.  

The indexes were also quite weak after several of the EU nations offered Greece support but it was not in the form of money….many of the European countries that utilize the euro (a plunging currency of late) said only that “we will take determined and coordinated action, if needed, to safeguard financial stability in the euro as a whole.” EU leaders said they would seek advice from the IMF after an assessment is due in March (this is a long time away). Greece still needs to borrow 54 billion euros ($75 billion) to fund their 2010 budget; it appears that they are only offering moral support and as such the odds of borrowing the money they need at a reasonable rate is become more unlikely with each passing day. Remember the rumor earlier last week about a German led bailout of Greece (I do remember it well as many of my good shorts were taken out of play on the short-covering romp) well, these same officials are trying extremely hard to put that rumor to rest saying, “we won't let Greece be alone but there are rules and they have to be respected.”

We saw this past week that the 2009Q4 GDP for the entire Euro zone rose only 0.1% after a 0.4% rise in 2009Q3. For the entire year the Euro zone GDP fell by 4.0%. Germany, which is the biggest economy in the group, registered 0% GDP growth in 2009Q4 while Italy and Spain saw their GDP’s shrink according to Eurostat. Eurostat also said industrial production in the zone fell by 1.7% in December. The outlook for the Euro zone is not good. The Southern European countries are trapped in an extremely overvalued currency and suffocated by dwindling competitiveness, a condition that will eventually breakup the European bloc of nations.

Consumer Sentiment for February dropped to 73.7 from 74.4 in January; unfortunately we saw that many survey respondents expect high unemployment to continue and most expected no gains in their home values or incomes for the foreseeable future. However the current conditions component rose sharply to 84.1 from 81.1; meanwhile the expectations component fell sharply to 66.9 from 70.1 well below expectations; and the 12-month outlook dropped to 79 from 84. Why does this matter, well dropping consumer confidence usually means consumers are going to continue being cautious with their spending, and this will not bode well for the retailers. 

The economic calendar this week is fairly robust and there are a couple earnings reports that could attract some market participant attention. There are no reports on Monday due to the holiday as some of the normal weekly reports have been pushed back a day.  We have several important earnings this week that could set some early market tonality [Hewlett Packard, Dell, Wal-Mart, Price Line and Kraft to name a few] these are semi important because their earnings are influenced by direct consumer spending; as the American consumer is the very most important part of this green-shoot recovery. Since we have seen plenty of very cautious guidance from other major firms that have already reported these firms will be watched closely this week to determine if they are experiencing something different and since Wal-Mart is one of the largest consumer outlets as such what they say will directly impact the markets. Price Line is somewhat important because they will provide insight into pending consumer vacations and business travel; their earnings show portray to the markets if travel trends are slowing or accelerating. Dell and Hewlett Packard are box makers and corporate server players and will provide critical insight as to PC demand as they both serve consumers and businesses and this insight will be valuable for the technology sector!  These will be the last of the big cap majors to report for quarter. After this week the 2009Q4 earnings cycle is just about officially over although there will still be some stragglers.

We are just a few weeks away from the start of the 2010Q1 earnings cycle (and this one is going to be very interesting) and we are starting with mid quarter updates (and confessions) and we are about 3-4 weeks from the usually warnings/guidance period….and worse yet since we are half way though 2010Q1 the proverbial horde of numbskulls called analysts are busy updating their estimates (taking info generated from these firms and putting their letterheads on it) for 2010Q1.  

This is important earnings guidance as it tell us a lot…..This past week we saw dismal guidance and earnings from Ingersoll Rand (IR) and thanks to the Greece contagion their stench was masked over as IR stated that overall sales plunged 9.9% significantly more than expected. Their competitor United Technology (UTX) also reported a similar 13.5% drop in sales for 2009Q4. IR warned that construction activity remained very weak and as a result of that contagion it weighed down sales of commercial heating and cooling equipment. The IR CEO warned “We expect challenging U.S. and European construction markets for most of the year and North American commercial markets to decline through the first quarter.” I listened to the conference call and I encourage you to as well, as on the call the CFO stated that U.S. supermarket chains had significantly reduced capital spending and weakened demand for new refrigerated cases and air conditioning systems weighed on earnings as well.

I was amazed this past week that so very many on bubblevision were so worried about a Greek debt default and most no one was paying attention to absolute awful U.S. bond auctions this past week as on Wednesday our treasury auctioned off $16 billion in 30-year notes. From that auction we saw that the primary dealers bought 47%, indirect buyers 28% and direct buyers 24% a record percentage for direct mystery buyers as of course there are no records of who those direct buyers were. They could have been the Fed or other government entities buying to support the auction and give the illusion to those ill informed of sufficient bidding. What disturbed me was that indirect buyers came in at 28% was a sharp decline from the 40.5% average. Indirect buyers are normally foreign governments (China, Japan the biggies) and this is very troubling as if this is a trend developing in purchases by these very entities that have supported our ballooning debt in the past and they start to withdraw, we could see a dramatic increase in interest rates. I have been warning my readers for over 6-months now that our treasury will eventually have a failed auction that will collapse the ballooning debt house of cards and Wednesday's auction was a warning that we are getting closer. The bond market was generally smacked around this week with the long end lagging in front of supply, better data and emerging resolutions for Greece. The auction capped a week of $81B 3-10-and-30-yrs which can be described at best as ugly (a (D+) and very poor.

FYI: A little bond information….. Direct bidders normally buy directly from the Treasury and consist of entities like the FED or a U.S. government agency or GSE (government sponsored entity). Indirect bidders buy through one of the Fed’s (bastard children) they are called primary dealers and they are authorized to handle transactions. Indirect buyers are normally foreign governments or other central banks. Note….primary dealers also buy for resale to other unsuspecting investors as a premium. Very often primary dealers are forced by their stepfathers to bid on the securities offered in order to ensure the auction does not appear to be extremely lousy or fail which would spike interest rates through the roof. If they are forced to purchase the debt they have historically had to resell it, and sometimes at a discount to free up their precious capital. They along with the Fed who reports their true activities to know one are the inventory purchasers of last resort; so the primary dealers have to step up to pick up the slack; and we never what to see record primary dealer purchases because it means there were not enough bids otherwise, a nasty trend if it continues.

Some interesting news articles on the Bond auctions:

• Who are the direct bidders at bond auctions?

• US $16 bln 30-yr auction draws soft demand

Another Contagion which was under reported and basically ignored raised its ugly head again on Friday and it should have significantly plague traders/investors but for some strange reason it was ignored…The credit default swaps on Dubai debt spiked hard to 630 basis points and are within 4 points of the November high when the potential default on the debt was first announced. This to me suggests something is about to happen that has not yet hit the news or been factored in. Some news agencies caught the news.

• Cost of Insuring Dubai's Debt Jumps

• Dubai Default Swaps Jump to Highest Since Debt Delay

We are entering options-X week, where we historically see some increased volatility and with the near-term charts quite over-bought and the daily-charts turning up (or is it a head-fake) the daily's on the major indexes have crossed above their respective downtrend line so this relief rally is the bulls to lose!  As I stated on Friday in our real-time trading room…. All the indexes are at/near or have broken key levels of support and appear headed for a decent correction, but we should not expect a straight drop. Right now the bulls do not know that they should be very concerned with this retracement as far to many believe it is only going to be a shallow 10% correction I believe it will be far worse 30-50% of the move off of the march-02009 lows to January highs is my best technical assessment. As we have seen during this earnings season cautionary revenue guidance and lackluster EPS guidance...its have to believe that institutional investors and the so called smart-money players will commit new money into these shaky markets as they are likely worried that there could be a double dip ahead (as real demand is distinctly missing from the majority of recent earnings releases, as many firms are still making earnings by slashing costs deferring taxes and fuzzy-math accounting).

Many fund managers and smart-money investors may just move to the side lines and many may park the money in short-term bonds as sort of a safe haven so they can position themselves to profit from a potential market dip (they will be liquid enough to be able to buy selective quality stocks) There is still a looming debt default contagion by Greece...but this past week it was mitigated by the EU and European countries trying to bolster the Euro).

We have other potential major market contagion (bad bond auctions...we had a lousy 10-year auction and a terrible 30-year auction this past week and the markets this week just managed to totally ignored these contagions ).

There are still looming geopolitical events. That would mean moving to dollar-assets instead of stocks or the once hot commodities. As I forecasted we have seen a very-decent commodity selling-event since early January and as I predicted the dollar has risen to new 6-month highs this past week; the rotational trade is underway and I don't think it is done yet as many firms could be seeing a way of redemptions in the days and weeks ahead!

Nevertheless in the past decade a weekly (or better yet a monthly roll-over of the MACD from such overbought conditions has occurred infrequently and each time we have seen very powerful selling events!

In the past several months I’ve been accused of being a very pessimistic gloom and doomer. At times my prediction and forecasts have to many sounded exceptionally and overly pessimistic and sometime a few readers even asked what I had been smoking; of late many publishers of stock-market-timers chose not publish some of mt recent works, but that hasn’t been a problem for my subscribers; the calls were based on what I believe to be very sound and reasoned based on sound technicals (remember chart reading is very intense and its really all about sentiment and the ability to extrapolate from the charts true market intentions (greed/fear....bullishness or bearishness; as real investors vote with their wallets and chart reading interprets that vote from the herd!) we also have fundamentals that are extremely important as are economic indicators and it was out of these variables that my exhaustive-top call emerged and so far it is playing our as expected….but now some of this move is now behind us…its in the past now what is the market likely to do this week and nest....

I'm still bearish right non on a longer term basis (but on a near-term basis I'm of the belief that we could see an options X relief rally especially after a potential drop off please review the entire technical sections below) for the intermediate and longer-term periods...The near-term charts as well as the daily-charts are oversold, and a potential bounce is not out of the question.

On Friday we could have formed a potential reversal, we will need to see confirmation of a trend reversal on Tuesday….with either a gap-up or a slight pull-back then a ramp job (we have seen mutual-fund-Monday ramps in 34 out of 42 Monday’s (will it convert over to this coming Tuesday....during option-"X" , where futures players premarket some how manipulate a magical gap-up and then they attempt to press the position forward….we need to be on the look out for such a development!

After months and months of an artificial rally, where 80% of the gains in the indexes have come on 34 Mondays, of blatant upward manipulation the indexes now look poised to reverse.  I believe wholeheartedly that we have either already posted or we are about to post the third major top in the various indexes in this decade; and maybe it happened this past week or maybe we will start the mega-roll-over in the next several weeks as earnings season comes to a close or at my next major inflection turn date that is forecasted to fall in February 8^th to the 11^th from my vantage point the major key at this juncture is not to attempt to pick the proverbial so called exact top….this can be a foolish endeavor as the level of market manipulation is at historic highs as the Fed and treasury and major-lecherous banks/bankers who are a primary-responsible party to the major economic implosion of the housing-sector and debt-markets.