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Metric System

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Hey Snoop, I'll see YOU on CNNfn at 9 a.m.!

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Good morning and welcome back to the fine line. With yesterday's fixed income briss, Uncle Elmer snipped rates to their lowest levels in 45 years. The language of the text was politically correct, so to speak, as it sprinkled a bit of hope with a dose of reality. The Minx had a lot to digest, both figuratively and literally, as she swallowed the 13th cut that edged us closer to ground zero. Now, with quarter-end looming and the angst levels zooming, we've arrived at yet another critical juncture. In an effort to bring clarity to the murky muck, I thought it might be helpful to take a quick walk through our primary trading metrics.

Technicals

The perfect storm has seemingly arrived in chart land. With the S&P, NDX, DJIA and BKX all sitting on their trendline from the March lows (on both an intraday and closing basis), it's put up or shush up time for the bulls. As discussed, one of two scenarios will likely unfold. Either these levels hold and the manic panic turns the collective attention to a new "higher high" or the "trend is your friend" camp may lose its catalyst. To add spice to the mix, there is a dandruff alert in both the S&P and NDX on a one-month chart. If these head and shoulders patterns "confirm," there's the potential for a downside double whammy. Factor in the triple bottom in the transports (from April) and, well, it's clear that these are critical levels.

Psychology

While it's true that sentiment extremes can remain skewed for long periods, the current imbalance is, at the very least, flashing red. Investor's Intelligence indicates that 59.4% of the crowd are Hoofy's heroes and a paltry 16.2% is Boo's crew. That's a crowded bull camp, my friends, and the anxiety associated with quarter-end has sucked fresh money into the mix. We've long discussed the self-fulfilling prophecy of dip-buying and, as we know, it'll work -- and work well -- until it doesn't. With no visible catalyst on the horizon and the mark-up vs. lock-in debate gaining traction, perception will create reality in the sessions ahead.

Fundamentals

While conditions stabilized following the war, and there are isolated areas of marginal improvement, corporate visibility remains muted at best. It's true that the market, as a leading indicator, will rally (fail) before business picks up (falls) but, at a point, there will need to be validation on the earnings front. The sad (but true) fact is that valuations are closer to levels that have marked cycle tops rather than bottoms. On the heels of the bubble, however, expectations and latitude remain embedded in the financial mindset. While we're far from (new economy) extremes, we're also a heckuva long way from a downside disconnect. If you're in the excess-breeds-excess camp, as I am, multiples have plenty of room to contract.

Structural

In a word: liquidity. That's the spark that ignited the dry Iraqi forest, which triggered the technical breakouts which, in turn, morphed the fear of losing into the fear of missing. The agenda has been powerful and effective in reflating the equity markets and it's clear that it's the modus operandi for the foreseeable future. As Elmer has subtly acknowledged his fear of deflation, the FOMC and administration has made every conceivable effort to muscle the tape higher and buy some time. There's no edge in gaming when this will abate, but it remains the most tangible element of the current rally. On the other end of the spectrum, keep a close eye on Fannie Mae (FNM:NYSE) and Freddie Mac (FRE:NYSE) and the specter of derivative concerns. While no fire alarms have sounded yet, the smell of smoke is slowly making it's way through the marketplace.

What's the takeaway? It's too early to pen an equity epitaph, but I will offer that the conditional elements of a reversal of fortune are in place. If the liquidity injection continues and the agenda stays true, the rally may have further legs and a renewed spirit. If, however, the much-anticipated march higher doesn't unfold, the combination of trapped bulls, technical breaks, economic uncertainty and (potential) derivative concerns smacks of a trading top -- and perhaps the end of the rally of 2003. We don't have to make that call right now, we just have to respect the two-sided risk and take our journey one step at a time. With a little luck, a lot of discipline and a positive attitude, we'll find our way to profitable days.

Good luck today

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