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Why It's Not All Bad

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Could the market actually be headed for a great end-of-year rally?

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There's too much negativity, though it's probably got some merit here in the very short term and the tape definitely feels heavy to me. However, I wouldn't confuse the apprehension by managers to put assets to work while macro issues come into focus for a lack of firepower. I know I'm going to get crucified by some people who I hold in high esteem for saying this, but my suspicion is this market is setting up for a fantastic end-of-year rally.

The correlation between forecasts of a recession and the performance of the SPX over the subsequent quarter is effectively zero. (from www.cxoadvisory.com).

The correlation between fluctuations in the Eurodollar and the SPX performance over the subsequent two months from which the slides occur has an r2 of 0.04... so if anything there is a very slight correlation between a sliding dollar and a higher SPX.

In September alone, we saw $23.6 bln in equity inflows or 17.55 bln adjusted for ETFs and another $10.7 bln in Taxable Bond Inflows. This is consistent with what my taxable bond friends are telling me: the credit markets have essentially turned themselves back on. (from www.amgdata.com).

Short Interest on the NYSE is up 20% since the beginning of the year which I believe is an indication of an abundance of negativity (I have opined that when you see stats like 60% of investors are bullish that perhaps the sample set may be askew). Since July, short interest on the NYSE is off from an all time high by 9%... setting up for a end of year rally?

Am I the only person who believes that the sharp drop off in new housing starts is a good thing? It's hard to imagine that there is a constituency of people who look to that stat to confirm for them that the housing market is in shambles.

Why is a sharp rally in treasuries prompting China to sell treasuries in August a bad thing? Perhaps the U.S. is just suffering from performance jealousy, but I do agree that over the long term, it can very well be a China's mercy. However, in the short term, it has created liquidity that will, in all likelihood, be recycled back into the U.S. economy.

I agree that the credit band aid is an impending disaster looking for a place to happen, but between now and the end of the year what I see is an improving credit market recovering off of panicked lows, defense of market leadership, performance chasing and the ammunition to get it done exactly that way.
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