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Exploring the Hump


Everyone knows that tall trees need good roots...


Good morning and welcome back to the shack. Yesterday bent left barely a dent as Hoofy dug deep and firmed the descent. He knows, as do you, the technical glue that's holding this tape from bidding adieu. "You can run but not hide," said Boo with some pride, "but watch where you step 'cause I won't be denied." Is it true (can it be?) that he'll soon take first fiddle? Or will he be hushed, squeezed to shreds and belittled? It's Hump Day anew in the Minyanville Zoo so saddle up strong and let's look at the view!

The bears who cried wolf may have reached for a tissue but what's in the past is not part of the issue. Throughout the last eight months, their incessant reminders of bubble past incrementally lessened Boo's credibility. Slowly but surely, as the market lifted, fear was replaced by need--the need to believe, the need to be involved, the need to participate, the need to make it back. We used to talk about selling hope and buying despair but that's been drowned out by the massive liquidity injection. More likely than not, however, it's more apt now than ever.

You don't have to twist my arm to illicit an honest diatribe. I've got a lot of friends who remain steadfast bulls and I have the debate all the time. The most salient argument I've heard is that we've got plenty of room to rally and still remain in a secular bear pattern. Heck, S&P 1150 would represent a 50% retracement of the bear market blues and between the that, the leadership from the financials and the steady trend (higher highs, higher lows), you've gotta respect the potential. I can't (and won't) say that it's not gonna happen--particularly with Dubya's vote ticking closer.

As trading is a game of probabilities, however, let's look at the backdrop in which we're now operating. Volatility levels, which measure complacency, are near multiyear lows (despite the fact that we're at war). Sentiment measures reflect a widespread belief that we're in a new bull market (when is the last time everyone was right?). Valuations, while considered by some to be cheap (versus bubble levels), never reached trough multiples (they're actually at peak levels). And, jeez, if real estate is a lagging indicator, one could argue that the bear market has yet to begin in housing. Factor in a massive deficit, dwindling dollar, total debt that is 350% of GDP and a derivative based financial foundation and, well, it's enough to drive you towards guns and food.

I don't know when it's gonna end but I know how it's gonna end. The teletubbies will scratch their heads and opine that the good news must be baked in. Meanwhile, mom and pop--who have been squeezed into the market via low rates--will helplessly watch their home values, portfolio holdings and livelihoods unwind. Pretty? No, it's actually very sad. Imminent? Can't say, but rest assured that Elmer and his buddies know exactly what's going on and they'll pull every punch to make sure that it's not today's business. Some will say that it's the Fed's responsibility to do so. I would argue that the sooner they let us take our medicine, the quicker a sustained economic recovery can grow roots.

Heading into today's session, I continue to cast a wary eye towards Snapper as I wonder if he's got one last zing in him. If we're not at a turning point (to the downside), I think we're close...but I respect the fact that the last three sessions might have attracted some pressy bears (and new shorts). I continue to be in 'fade rally' mode but understand that any jig above S&P 1050 will likely point to the double top (at S&P1060). If the tape squeezes through there, that would likely shake out the newfound fur and set the table for Boo's breakfast. If the Minx can't find her legs above S&P 1050 and the breadth continues to stank, S&P 1044 should be dust in the wind, dude.

A quick walk through the morning dew finds an anemic bounce attempt for the Jinx, a flat Europe, firm gold and further dollar squalor. Key sectors today include the biotechs and internets (leading indicators), the financials and homies (rate sentiment plays), retail (consumer proxy) and the saucy semis (gap remains below). Applied Materials (AMAT:NASD) reports tonight and that'll be a focus, both from a posturing and reaction perspective.

I'm pretty ill right now--I've been fighting this darn bug and had hoped that yesterday's flu shot would have put it to rest. Thus far, it hasn't and I'm likely gonna head home to the warm confines of Chez Harrison. I'll be monitoring the action and will do my best to communicate with ye faithful Minyans. Please know that I understand the importance of this juncture and will do what I can. Trust me--I wish I felt better too.

Good luck today.

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