My friends I will be away from trading Monday morning, as I have several appointments medical and with my Lawyer....its a Monday expect a bullish tone for the open (Merger/Monday) and we follow Asia's and Euro land's lead! (tone) watch for announcements from "C" or other banks regarding TARP.....I will be back in time to trade the close (after ~1:00) expect a Gap/up and then a slight run....volume should be anemic...the trading desks will be completely in control!  The bulls will be tepid ahead of the FOMC meeting announcement on Wednesday is my best guess. The markets could get a boost (on dollar weakness) or succumb to selling on dollar strength! Dubai news needs to be watched as there are rumors that they will get emergency funding from Abu Dhabi this would be a market positive as well!

I’m still seeing smart money selling into strength time and time again; a clear indication of distribution. As such please take on LONG positions very carefully at these levels as the risk to being long at these levels is compounding every day especially in over-bought technology and consumer-cyclicals and retailers  Strap-yourselves, as it is sure to be another wild another wild rollercoaster ride!! The question is do you want a ticket to partake of this amusement ride     I believe we are close to another major inflection period for the markets, so please trade cautiously and be quick to protect profits.   Please remember folks there are usually 7-8 bullish (participants) to every 2+/- bearish traders/investors, so the propensity for bullishness is almost always stronger, as no one wants to be a party pooper, especially those funds that are playing with other people’s money as they attempt to pad their books into their fiscal-year end! However the reason that the market usually drops 4-5 times faster then it goes up is liquidity, when selling picks up is a contagion and the lack of buyers due to fear, can feed on itself very quickly like a plague or a quick acting cancer, as such markets plunge (normally) quicker than they go up!   

Many mutual fund and hedge funds and various banking trading desks are sitting on huge gains from the March lows (or at least they caught some of the trend). The Dow is up 62% from its lows and the SPX 66%. and that is a heap of stellar gains (at least 5-6 years worth) and it came in only 9+ months. There are many insider-funds, institutions and money managers just counting the days until the calendar jumps to January so they can close out those huge gains. Its important to know that if they sell them now in 2009 they have to pay taxes almost immediately; however if they wait just a mere 3+/- weeks and book their gains January they can postpone those nasty taxes for another year this is a huge incentive to hold the markets in a very tight range or with a slight bullish tone....so from my vantage point and past knowledge of year-end-trading this means quite a few fund managers are going to be sitting on their hands for the next few weeks and praying that the market does not screw them by selling off...and then I'm guessing that there will be some additional window dressing heading into the new-year in hopes of keeping the market at or near these relative highs; this window dressing could keep the markets waffling  until we enter the new-year.  The wildcard here is the large propriety trading desks and huge overleveraged hedge who will be endeavoring to front run any potential January selling-profit taking event; so the $64,000 question to be answered is do they sell into any initial; Santa Claus rally or do they help press the markets higher into January?
 

On the near term the indexes especially the Dow is very overextended but over the course of the next couple of weeks it could move up further as the volume is anemic, I think options expire this week will determine the markets direction into the end-of-the year; there is a decent probability that fund-managers chasing performance and those attempting to secure their gains could be the driving force for buying into year end. The 10,575-10,600 level to me should be a difficult wall to hurdle and the Dow 11,025 a huge brick wall (a mere 500+/- points from here), as we can not rule out a Santa rally and end-of-the year manipulated buying spree (hell those in charge are looking for bonuses they are not playing with their own money! I'm watching technicals already start to deteriorate, as this momentum rally is very tired. Now that the market is very stretched in valuations and price/volume divergences are growing, we will start to see the technicals break down

However when I look at the weekly and monthly charts looking at out to say March/April, I sincerely believe that the various indexes sell off very hard I think we could see 1,700-2000 point drop on the Dow, 140-200 point purge on the SPX and 275-450 point drop on the Nasdog mainly because if you look at the technicals of the market right now to me, they appear to flashing major sell-signals and the fundamentals are deteriorating as well. The financials are weak, energy stocks are retreating, and the overall market breath and participation is quite weak, too weak for a sustained bull market. The bullish sentiment is way to bullish and euphoric at this point in time and if you look at the longer term picture of the market, where is the fuel and catalyst for a move up from here.

The various equity markets around the globe are still dancing to the same tune (the dollar-carry-trade, buy commodities tune) as the markets near their end-of-the year play….but many old time market pros like me are questioning how long that trade will last (I thought 2-weeks ago that the trade was starting to unravel) and whether the Dubai, Greece and Spain situations may ultimately be seen as a near-tem catalyst toward breaking the white-knuckle link between the deteriorating dollar and rising riskier assets classes, like stocks and commodities (hell the Fed has been the primary-player by keeping rates so low for so long that fixed income players (those needing safe havens have been forced to chase performance/yield as well, they can not enhance their incomes at 0.5-1.0% interest rates that many money markets are paying).

Emerging markets have been one of the biggest beneficiaries of the carry-trade and trading desks hyping the hot-money commodity trades. I believe that this house of cards could easily come tumbling down as these inflows of funds into emerging markets could slow substantially as investors reconsider the huge risks in many of these markets versus their already lofty valuations/prices as the valuations are decoupled from reality in my opinion in a big fashion. I believe that very soon several of the big trading desks which have been establishing new-short positions (rolling out of their longs) will stealthily infer the valuation concerns/contagions and bring there divergences into the limelight. It's one of those points which may serve as a wedge between the U.S. market and emerging markets; and the direction of the greenback. Way too many emerging markets are trading at substantial premium to the SPX at historic levels and every time that happens, they tend to disappoint and cough up huge gains very quickly when the selling starts.

There has been a massive wave about the coupling of the weak dollar and the bullishness in the indexes and especially the commodity stocks in absence of true demand, and this correlation started in March. It doesn't mean such correlation will last forever but to see a reversal in this correlation meaning that the markets can go up and commodities can rise with a rising dollar we would need to experience a real-demand driven growth; as during the great bull market of 1982-2000 the dollar soared after reaching a low of 79.12 in 1992 to a relative high of 120.24 in 2002 and commodities plunged (even on strong global demand). Gold fell in 2001 to $256 an ounce from its peak of $850 in 1980; crude traded as low as $10.50 in 1998 before the Bush Cheney team ensured that big-oil would prosper, by reducing supplies domestically and partnering with the Saudi Arabs in their quest for wealth.

However, today’s current market correlation between the greenback and commodities presents us with some very useful near-term trading data and information about the over all state of the markets and the current trend. And it's very simple from my perspective right now, as I believe that the majority of the market action and this bear-market relief rally was spurred by the large propriety trading desks of the likes of (GS, MS, BAC, JPM, LM and hedge funds) as right now program trading is at historic highs as this market is driven by these trading desks for the time being. They like me are trying to find some order (or they will create it) so that they can exploit the situation, they desperately want something that can be traded, and then once found they will run it as much as possible; despite the deteriorating fundamentals…as in their world they live to trade 9as they play with other peoples money, and now even taxpayer money).

Right now the market is definitely in a very significant transition period after such huge reversal gains from the March lows and it’s still looking for real concerted value/growth driven direction. For the past several months the trading desks have propelled the markets higher, climbing the proverbial wall of worry by shorting the greenback, taking a leverage carry-trade position in the dollar and bidding up commodities and related stocks with reckless abandon and those running the trading desks and quant programs basically were laughing their asses off as many like myself attempted to find rational explanations for the rally, and in the absence thereof short-into-selective areas of OHR…the trading desks with taxpayer monies leveraged up, have been relentless as they produced a green-shoot manipulated rally on their premise that growth was around the corner and so will profits be, and these severely over-valued stocks will grow into their very rich P/E’s. I was extremely surprised to hear that Cramer this week stated that he transport sector is telling us that the bull market is alive and will add 35-50% more upside next year (I almost choked as the rails, transport and airline earnings are dismal, as are their load rates. He certainly believes in the Field of dreams scenario!

The various market were trading on technicals and real fundamentals until the proverbial March bottom, then they abruptly (introduction of TARP and massive taxpayer bailouts) reversed and then they started trading on hope and prayers and hyped sentiment of green-shoots and dreams of profits dancing like sugar-plum fairies. And for the past 9-months the indexes and various sectors have ignored the fundamentals and reality of growth prospects and future demand.

Never one to mince words, former Fed Chairman Paul Volcker let loose this week in England. He spoke at an exclusive meeting of financial regulators and high-level bankers, saying that there is very little evidence that innovation in the financial markets has had any visible affect on economic productivity; and there are instances where it has had the opposite affect.  Then he told the stunned audience that the single most important contribution any of them had made in the last 25 years was the automatic teller machines which were at least "useful" (I love his candor!); he went on to say that in their rush to develop “innovative” new financial products, bankers the world over forgot that they're supposed to be safeguarding our money. They also completely ignored the fact that banks are enablers, not risk-takers. And, in doing so, they became a major part of the problem.

I believe that if Washington wants to get serious about avoiding a second bubble and an even ‘Greater Depression” let's bring back elements of the Glass-Steagall Act which, in case you don't recall your history class, was a Depression-era law that separated Main Street's banking from Wall Street's banking. That way, we specifically limit the kinds of risk taking that Wall Street seems to thrive on by separating it from institutions charged with safeguarding taxpayer deposits.

Following the global meltdown, the shotgun marriages and bailout legislation, the nation's four biggest banks - JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo now control more than two-fifths of all bank deposits, more than 66% of all credit card accounts, and over half of all mortgages in this country. They also run trillions of dollars in very risky trading ventures that, as things stand, can come right back and blow up in their (our faces as we almost always back-stop Wall-Street as they very seldom accept losses of any magnitude).

I'm still bearish right now (see my technical section below)....but between here and options-X (quad-witching) and the end-or the year it could be dicey as fund managers chase performance and fight to maintain their gains to secure their bonuses...I will utilize any bullishness on this week to establish some longer term (2-4 month, Short positions *or Puts* as we would need to breech the relative near-tern highs for me to change my bias outlook....as such I'm looking to establish call positions and outright positions in the inverse leveraged funds....see a partial list below (we could also use a put-write strategy as well (example of a put-write play, we could write/sell the January 2010 SDS  $36 strike puts for $1.92 taking in $192.00 per contract, if they are pus to us at $36.00 we have a built in protective stop-loss of $1.92)....I'm also looking to SHORT a host of high-beta high P/E stocks as well (like  AAPL, AMZN, PCLN)   In a nut shell I'm looking for the resurgence of a very significant correction to take the bulls by the bulls in the days/weeks ahead and slap the bulls about...as the greenback is more oversold than at any time in history, way to many folks all leaning to the Short-side of the dollar market!!     See my in depth analysis below of various market conditions!

How has your 401ks (or are they now 201ks) and IRA account been doing for the past 10-years, the market performance has sucked.....Not a very great 10-year period

• Dow                  closed at 11,502 in 1999, well off Friday’s close of 10,472….(off by 1,030-points)

• Transports      closed at   2,977 in 1999, a winner as Friday’s close of  4,094 (up by 1,117-points)

• Nasdog             closed at   4,186 in 1999, well off Friday’s close of   2,190….(off by 1,996-points)

• NDX                  closed at   3,756 in 1999, well off Friday’s close of   1,792….(off by 1,964-points)

• SPX                   closed at   1,469 in 1999, well off Friday’s close of   1,106….(off by    363-points)

• Russell-2000  closed at      505 in 1999  a winner as Friday’s close of  600…(up by     95-points)

• SOX                  closed at      704 in 1999, well off Friday’s close of      335….(off by    370-points)

Follow the money!

This week we saw that Lowry’s Buying Power index has dropped from 122-112 a drop of 10-points while Selling Pressure rose 4-points from 766-770; they pointed out that, From the 11/09/2009 advance through 12/03/2009) close, Buying Power has dropped 4 points while Selling Pressure has dropped 37 points; thus, the market appears to be floating near its recent rally highs due to a lack of distinct selling (fund managers do not yet want to sell they want to lock in their huge gains from the march lows), still we are not seeing any buying activity either; or  improving buying demand for stocks.

• Investors have withdraw 12.9-billion out of stock funds in November; net withdrawals since March have accumulated to 25-billion, and they sold 8.8-billion in stock ETF’s in November, while they saw that investors plowed a staggering 312 billion into bond-funds (would you do this if you though there was more upside in the indexes?). Its worth noting that short-funds money flows have increased by 10.2-billionin November and they are seeing that almost 5-times more new capital is being devoted to short funds than long-funds (this could provide fuel for the bulls if we see orchestrated gap/runs-short-squeezes)  

Still, “net long” positions at professional money management firms remain in the 53-62% range, which is still below the 70- 75% level reached at the recent mania “October 2007” top; which suggests the potential for more upside through the end-of-the-year is possible as the under-invested fund manager chases bloated stocks driven by performance anxiety, especially bonus pressure (the thought of not getting one), and ultimately job pressure.

AMG-data….Excluding ETFs; for the week ended 12/09/2009 equity funds reported net outflows totaling $1.454 billion as domestic equity funds report net outflows of $1.313 billion and non-domestic equity funds report net outflows of $0.141 billion….(according to the AMG-data I reviewed; the rate of inflows to non-domestic funds stands at $1.137 billion/week, as measured over four weeks...all equity fund ETFs reported inflows of $1.189 billion…emerging market equity funds report inflows ($0.220 billion) for the 39 consecutive week, continuing their longest weekly string of net inflows on record (since 01/08/1992….I believe this is very close to marking a top and a likely reversal in the weeks ahead)... Money Market funds report net inflows, totaling $2.147 billion.

New-Fed-data for the third quarter…..worth reviewing; as we saw that exchange-traded funds added holdings of U.S. municipal securities at the highest rate among investor groups in the third quarter, based on Federal Reserve Flow of Funds data which for the first time broke out ETF buying (I wonder why).  Municipal holdings in exchange-traded funds rose 28% to $5.1 billion in the July-to-September period (the heart-of-this relief rally from the March lows, according to Federal Reserve data.  

• Asset management firms have created at least 20 ETFs to invest in bonds (which has absorbed bond-buying) and bond-notes issued by state and local governments since the September 2007 inception of the iShares SPX National AMT-Free Municipal Bond Fund. Mutual Funds:  Mutual funds, whose net asset values are quoted once a day, were the biggest buyers of municipal bonds during the third quarter based on dollar amount. Their holdings grew $29.3 billion, or 6.8%, to $460 billion, the Fed data showed. Households, the largest single investor group in state and local government debt, added $10 billion, or 1.0%, pushing their holdings to $979.5 billion, the Fed data showed.

• Foreign investors, whose municipal holdings rose by the most of any investor group in the second quarter, accelerated their buying as sales of taxable, federally subsidized “Build America Bonds” enticed buyers more interested in higher yields than tax-free income. The “rest of the world” category in the Fed data rose $7.9 billion, or a whopping 17%, to $53.5 billion.

The awful deterioration of real wealth suffered by America's middle class  (it there is even a middle class left) from the housing collapse and resulting credit debt debacle caused by the greedy lecherous overleveraged banks/brokerage firms constriction came into clearer focus in the latest Fed's Flow of Funds data which showed U.S. household’s net worth rose by $2.67 trillion in the third quarter, and the increase was largely the result of the continued rebound in the stock market from the March lows.

But the markets participants completely overlooked the contagions in that decent headline report as if read in its entirety (something few investors or fund managers do) news was a sharp, downward revision in household net worth by $2.38 trillion in the second quarter (this was a dismal reading), and it was the result of a complete and more detailed accounting for the plunge in home prices during those months (home prices have not rebounded at all so far in the fourth quarter either. Also not widely reported on was what the Fed-heads consider to be “households” as it strangely includes hedge funds, which probably are beyond the reach of most Americans.

We have seen that the average individual American investor has actually have been dumping stocks and for some strange reason they have been seeking out the safe haven of lower-yielding bonds, so it's questionable how much of a lift in wealth they've gotten from the rally (more likely the wealthiest of Americans reap the biggest gains).

The report showed that households also continued to reduce their indebtedness for the fourth straight quarter while total U.S. debt shrank for the second consecutive quarter, even with the massive expansion of the Treasuries borrowing to fund the federal budget deficit…that was hard to believe. The contraction in household debt wasn't just because of John/Jane Doe’s personal pledges to get their financial homes in order after having tapped out and overdrawn their home ATM machines. Their debt loads have also been reduced (not in a very positive fashion) by the rising tide of mortgage defaults, home foreclosures and credit-card defaults, not exactly a wealth-enhancing machine now is it. 

So, while the numbers on their wealth are turning up, the majority of Americans are becoming pooper and more pessimistic on the economy and their own financial conditions, according to a Bloomberg poll. And they're enraged at Wall Street, which they blame for their plight.

How will this market-trend move forward….as according to the Fed's numbers, households added a mere $36 billion in equities in the third quarter, down from an average of $430 billion of purchases in the two preceding quarters, according to a recent Goldman Sachs research report.

On Friday we saw that stronger than expected retail sales and consumer sentiment put a floor under the stock market on Friday, as pro forma encouraging news about how consumers feel about the economy and how much they're spending sent the indexes higher.

The pro forma strong showing in retail sales last month (was a surprise to me) and the headlines raised hopes that consumers are starting to feel more comfortable opening their wallets after months of savings. The 1.3% increase was more than double the number forecast. The government's (self-serving report) retail report came as a huge relief to many investors who have been frustrated that consumer spending, the proverbial mainstay of our economy, has remained in a funk as other parts of the economy supposedly recover.

The preliminary Reuters/University of Michigan consumer sentiment index also increased more than expected in December as the data indicated on Friday (but for the past several months the revisions have been to the downside) nevertheless it was for the bulls another welcome sign. The Commerce Department reported a 0.2% gain in business inventories in October, breaking a 13-month streak of declines. That's a signal that businesses expect consumers to step up their purchases; or is it that inventories were so low that any incremental demand depleted them? I call it the hope and a prayer trade as hopes of an economic rebound have driven stocks sharply higher for over 9-months, but the advance has slowed in the past month as the funds, trading-decks of the to-big-to-fail banks lock in the year's huge returns from the March bottom and question what catalysts there might be to power the market higher this coming year (how will the banks and their trading desks due raising liquidity to press the markets higher). Though there isn't an empirical connection between consumer sentiment and actual spending, participants reacted positively to news that the preliminary consumer sentiment survey for December from the University of Michigan came in at 73.4, which topped the 68.8 consensus.

The markets totally ignored an CNBC sentiment survey that was purely dismal on Friday….as it sated that Americans remain quite pessimistic about the economy and have little trust in Washington's so called economic leadership despite $1.5 trillion in federal spending on stimulus and bailouts, the CNBC “Wealth in America Report” found. There were a  very few glimmers of hope in the survey. Americans on average plan to spend  a bit more this holiday season and are slightly less negative about home prices, though the nation's overall economic mood remains very foul.

·        Respondents to the survey expressed negative sentiments about the economy, stock market, housing values and wages.

·        Many are also unhappy with the job elected officials, including President Barack Obama, are doing to get the economy back on track.

·        More than half of Americans are pessimistic about the current state of the economy and the outlook for the future.

·        Most Americans disapprove of Washington’s economic leadership.

·        When asked about their confidence in American institutions and industries, just 24% expressed confidence in the Federal Reserve, 19% in the Treasury, 17% in healthcare companies and 10% in the financial industry.

·        When it comes to investing, 46% of the respondents said they have money in the stock market down from 79% in 2000 (including mutual funds, IRAs, and 401ks), while 42% said they have no money invested in stocks. 41% believe this is a good time to be investing in the stock market, but 48% feel this is a bad time to be buying stocks.

 Americans plan to increase their spending an average 10.5% this holiday compared to last year, but these gains were skewed significantly by plans of the wealthy (and Wall-Street, the top 5% of income earners; as they expect to spend considerably more. Middle and lower-income Americans plan are looking to reduce their spending dramatically.  

Last Friday’s steep pro forma drop off in the number of employers who slashed jobs last month amid other signs of improvement in the economy have brought renewed expectations that the Federal Reserve will be forced to raise interest rates sooner than later (they meet this Tuesday/Wednesday). That would boost the falling dollar and initially hurt equities as the dollar-carry-trade unwinds (commodities tied to the dollar and other dollar dominated asset classes would likely pull back as would their respective stocks/ETFs). 

This week, investors will be looking to the policy statement that follows the 2-day meeting of the FOMC for clues on the direction of interest rates and the unwinding of massive amounts of liquidity. Reports are also due to be released on housing and industrial production, and firms including Best Buy and FedEx are scheduled to post quarterly earnings (FDX better blow away the numbers or risk a further drop). 

When is a better-than-expected non-farm jobs report a negative for the markets….when it brings with it a threat of an earlier-than-expected interest rate hike…that’s when, and a strengthen dollar develops into some unwinding of the dollar-carry trade that helped propel this market higher in the past 5-6 months. Such is the dilemma that plagued traders this past week, even as a cadre of officials ranging from B-52 Bernanke to Geithner (I’m a bankers best friend) attempted to assure them that the economy is in no shape to support a hike for the time being (hum I though we have turned the corner and that we are on the path to prosperity with huge growth and robust job creation ahead). Oddly enough, downplaying the economic recovery helped to propel the indexes higher this past week…a strange divergence!  

While many so called analysts are professing that the worst is over for the financial sector and its clear sailing ahead, as most will be repaying TARP….it clearly doesn't mean that the group is out of the woods yet. As when we look at the technicals, the financial SPDR (XLF) continues to battle long-term over-head resistance from its falling 80-week moving average ($14.32) though it popped above this level on Friday. This trend-line has held the XLF in check since early August. In the options pits, the (CBOE) 50-day buy-to-open call/put ratio has been increasing since early October. Historically, advances in this ratio have portrayed weakness for the XLF. I have also seen that call buying on the ETF was coincident with major weakness in the financial sector in 2008, as short sellers used XLF calls to hedge their positions. It’s noteworthy that Barron's recently had a cover featuring Bill Miller, the Legg Mason Value Fund manager, with the exclamation, “He's Back!” This fund manager has very heavy exposure to many financial names, which killed his performance the past 18-months; as such the so called timing of the cover-story could have bearish contrarian implications for the financial sector.

How is this bullish?      Some experts like Cramer and Kudlow have repeatedly stated that the housing market has already bottomed (back in May), but one statistic indicates otherwise and defies their so called logic. The portion of U.S. homeowners who are “underwater” on their home loans (that is, they owe more on the mortgage than the home is worth) surged to a whopping 24.5% in the third quarter, or almost 10.8 million households, according to First American CoreLogic, a real estate research firm. Many of the underwater homes will ultimately end up in foreclosure.  Of the 10.8 million homes underwater, nearly half have a mortgage that is at least 20% higher than the home’s value (a huge negative contagion as this amounts to almost 6-million homes), according to the data compiled by First American CoreLogic. More than 520,000 of these homeowners are already in default on their mortgages. This is a huge over-hang of risk in the mortgage markets that no one is talking about or addressing.  Some homeowners who are underwater are fully capable of paying their mortgages, but they are in the elite group or top-wage earners that are ditching their homes anyway to the tune of 590,000

Well-worth the look.......There was an announcement by President Obama the other day that he is planning a second stimulus package darn it I almost forget it’s not a stimulus taxpayer bailout as that’s not very politically good right now, they will call it a “Jobs program”. The President is quoted as saying, “….we have had to spend our way out of this recession in the near term.” I almost choked when I hear that line! Spend your way to prosperity…what a novel and new economic approach, maybe he deserves another noble prize for conjuring up that premise!

Many mutual fund and hedge funds and various banking trading desks are sitting on huge gains from the March lows (or at least they caught some of the trend). The Dow is up 62% from its lows and the SPX 66%. and that is a heap of stellar gains (at least 5-6 years worth) and it came in only 9+ months. There are many insider-funds, institutions and money managers just counting the days until the calendar jumps to January so they can close out those huge gains. Its important to know that if they sell them now in 2009 they have to pay taxes almost immediately; however if they wait just a mere 3+/- weeks and book their gains January they can postpone those nasty taxes for another year this is a huge incentive to hold the markets in a very tight range or with a slight bullish tone....so from my vantage point and past knowledge of year-end-trading this means quite a few fund managers are going to be sitting on their hands for the next few weeks and praying that the market does not screw them by selling off...and then I'm guessing that there will be some additional window dressing heading into the new-year in hopes of keeping the market at or near these relative highs; this window dressing could keep the markets wafflingg  until we enter the new-year.  The wildcard here is the large propriety trading desks and huge overleveraged hedge who will be endeavoring to front run any potential January selling-profit taking event; so the $64,000 question to be answered is do they sell into any initial; Santa Claus rally or do they help press the markets higher into January?

I am still seeing several things happen across various sectors that has me very perplexed. One is the Apple deterioration and RIMM decline, another this year-end-airline rally out of the clear blue sky and lastly what the heck is happening in chip-land and semi-land as the recent chip/semi rally alone has kept a significant floor under the Nasdog as the semi rally last week was stealthy and it was substantial as the Semiconductor index rocketed over 8.1% for the week (and the fundamentals are crummy as many firms have experienced double bookings in my opinion). You would think somebody raised the all clear flag you can press into the semi/chips into the end-of-the-year the momentum is clearly the bulls to lose.. The SOX has significant OHR at 346-350 and if the bulls breech this level to the upside they could be off to the races (I will be shorting 350-355+/-)  semi sector has suddenly caught fire as we head into year-end.

Despite the incredible 60% rally and chatter of a new secular bull market many investors remain highly skeptical of the equity markets. David Rosenberg recently released his 10 reasons why the rally is over and Meredith Whitney says the market is again at risk of a downturn. But there is perhaps no one more skeptical of the rally than the great Richard Russell, of the Dow Theory Letters. Richard Russell continues to believe we are in a secular bear market and currently he believes we could be in or very near a topping process which will precede what he believes to be a very “vicious” downturn he stated this past week.

I haven’t liked the stock market. I can’t tell with any certainty at this time, but this bear market rally could be in the process of topping out. If it is, I think we’re in for a vicious collapse. Remember, rallies in a primary bear market are movements against the main force or tide of the market. In other words, during a rally, the bear forces have been held back. When a bear market rally breaks up, the market tends to make up for lost time. That means the selling tends to be rapid, violent and vicious. As I have said many times…I can’t tell with complete and unabashed certainty whether the advance from the March low is taking its last breath this past week; as it could be sustained on life support till the end-of-the-year. But if it is watch out; it’s going to get very ugly fast when the correction starts.

Perhaps the scariest aspect of another potential leg down (the (C) wave down in what I believe to be a very nasty secular bear-market ABC correction (see the SPX Elliot-Wave chart below) is the nasty contagions and very dismal ramifications with regards toward government and monetary policy.

Russell stated a substantial downturn below the March lows would mean that Fed-head policy has completely failed:  If the advance from the March low is topping out, here it would mean that all the Fed’s manipulations and stealth bank bailouts and efforts to halt the deflationary cycle have gone to utter waste. Furthermore, if the March lows are violated (and of course no one believes they will be) we will probably be in the final and most devastating and costly and down leg of this bear market.

We have consistently seen these past weeks that the stock market has been on a consistent bullish run since it bounced off the lows in March 2009. As stocks (especially high-beta and crap-stocks that have been placed on the HTB-lists) keep hitting new highs for the year, driven by the prospects (hopes and prayers) of a so called vast and global economic recovery, and many value investors like me are more than concerned about these lofty valuations. The P/E ratio on the SPX, for example, has risen to its highest levels in many years (depending on the calculations 27, 39 and 56). In addition, many once highly sought after dividend stocks, which were once selling at very attractive valuations just a few months ago, are now very expensive.

Since this bear-market leg has started we have experienced 2-distinct and significant relief up-waves (wave 1 and 3 of a 5-wave pattern) and now we are embroiled in what I believe is the third (wave 5) and last wave up in this corrective pattern what I believe is a (B) wave up and I believe we are very close to finishing this up-wave!

According to my wave analysis the 1^st sub-wave of the (B) corrective wave up was (a) which lasted 68-69 trading days from 3/6/09 to 6/11/2009….thereafter the second wave (b) down lasted from approximately 6/11/209 to 7/8/2009 a mere 18-trading days….and this was a very shallow retracement….here is the tricky part if wave (c-up of the B up corrective wave) tops in the next 5-10 trading days (likely in and around my next inflection period (11/6 to 11/13, we have a weekend and a holiday Veterans day on the 11^thin the mix) it would mean that the (c) wave lasted approximately 68-up-days plus 18-down-days or 86+/- days now not all Elliot-wave patterns are exact-linear-counts but I would pay particular attention to the 11/9/2009 date as it would be 86-trading days from the 7/8/2009 bottom!      

Now for my bullish friends….I am issuing a serious red-flag-warning as if I’m correct and I believe that I am, when the up-leg of this (B) relief rally is completed…we will become embroiled in a very-nasty (many will be in the land-of denial) plunge, and this will be the third leg of this bear-market super-cycle-down-draft, and this plunge will catch many if not all of the perma-bulls in a state of shock and utter denial…I believe that history will be repeated and we will unfortunately plunge our economy into a deep and protracted recession (hopefully not another great-depression) 

VOLUME on the bullish side is worsening as the days wear on.....When I see decisive breaks below the bottom boundary lines of Rising Bearish Wedges for the Dow, SPX, and NDX I will be announcing that a major/major top is occurring. I’m also seeing increased bearish divergences between price and actual market breadth, price and volume, and price and momentum indicators that I follow for longer-term significant market moves. Please watch the weekly MACD indicators which are showing very distinct signs of respective topping patterns in the various indexed and are now starting to curl over which is a very bearish signal.  The concept behind MACD is fairly straightforward. Essentially, it calculates the difference between an instrument's 26-day and 12-day exponential moving averages (EMA). Of the two moving averages that make up MACD, the 12-day EMA is obviously the faster one, while the 26-day is slower one. In their calculation both moving averages use the closing prices of whatever period is measured, in the sector I watch for longer term moves (I use the weekly chart). On the MACD chart, a nine-day EMA of MACD itself is plotted as well, and it acts as a trigger for buy and sell decisions. MACD generates a bullish signal when it moves above its own nine-day EMA, and it sends a sell sign when it moves below its nine-day EMA