Stock rally is stalling a little bit. This summer until September may be quite nasty. I suggest lightening up for possible reloading later, which still needs to be qualified by technical observations.

Gold is approaching the high ceiling again, due to stabilization of euro. It’s still the strongest currency, stronger than both euro & US dollar. If there is a buying opportunity this summer, grab it.

And sorry I haven’t paid any attention to oil & energy markets for quite awhile, since I’ve cleaned out my entire stake several months back. “Thanks” to BP, the entire sector has been sold down. And I’m not interested yet.

By the way, US debt is now 13 trillions now, not counting any of the medicare/social security obligations. Mark my words. Deficit will be at 20 trillions in less than 10 years, and US dollar will break down, creating the next big wave of inflation (at least in the US territories).

The longer stock markets don’t rally when they should, the more investors will throw in the towel. I believe there is a serious danger of breaking 1040 on the S&P 500, after which the markets will collapse at an even greater speed. I have already increased my existing cash holding by almost 50% in the last week, not waiting for the markets to give a final verdict. The counter rally is pathetically weak, and going further out into summer, the European debt complication will only get more serious.

As I have been suspecting that MACD on S&P 500 may do a head fake. So far however this head fake signal only lasted 1 day. It’s exceedingly weak. The market has very little underlying support now. There are more sells than buys, and sellers are getting more panicky. Though short-term wise it’s very hard to tell whether it will be up or down. I would still advise to stay away temporarily for awhile.

Yes, markets are quite oversold, but they can stay oversold much longer than you can bear.

Few technical indicators give a clear picture on the movement of stocks. Unfortunately, all indicators are often too late by the time when the markets have made their initial move. The more averaging the indicator does, the later it will give you a signal, but the signal becomes more reliable. The vice versa is also true. The less averaging you do, the earlier the buy/sell signal comes, but it becomes less reliable. MACD is one of the signals that does a pretty good trade-off between reliability and opportunities (although I must say that it is often too late to do anything about it).

Here are the daily, weekly, and monthly MACD on SPY which clearly illustrate the current trends, and my personal take on markets going forward:

On the daily MACD chart: The fast EMA has just crossed the slow EMA. I project a short-term rally that will not break the recent high at ˙˙5.14 at around mid-March to mid-April timeframe.

On the weekly MACD chart: This is the most dreadful chart. The fast EMA has crossed the slow EMA for a little while. On a weekly basis, it almost mean that SPY will NOT make any headway. In fact, most likely SPY will have to give back a sizable portion of the gain since the rally started in March 2009. I project that in between late April to late July, it is best to stand on the sideline, or even go short.

On the monthly MACD chart: the fast EMA has crossed the slow EMA by some margin. I believe that it is basically saying that for people who project a Dow going to $4000 in a great depression scenario are very likely to be dead wrong. Quite likely, the March low was the absolute low for this bear market. However, in no ways, it gives a total green light on buying the stocks. I think long term wise, markets will continue to trade in a big sideway. The sideway range will be rather big, making most perma-bulls and most perma-bears to continue in their steadfast belief.

In my projection, stock markets may make a lower high in about March timeframe. My advice is to sell and get out.

Despite my general bearishness, I want to emphasize that this is NOT 1929 great depression, when deflation ruled the days. In fact, at the next intermediate long of stock market probably 8 to 18 months from now, that low (which should be 20%+ lower than the current prices) should be bought. The longer term picture for financial markets is still
1. (long/intermediate term) Bonds go down.
2. Inflation goes up.
3. Stock goes up nominally, but possibly goes down if adjusted by inflation.
4. Cash will be “trash”.
5. Housing markets most likely stay flat AFTER it reaches another new low, EVEN with general inflation going up.
6. US dollar will go down, but not YET.
7. Commodity will be very volatile with upward bias.

The next big time bomb should be around mid-April to late June. Prepare to see the fireworks (and make sure your portfolio is not used as part of the fire powder). In the meantime before next big inflation comes, deflation & deleveraging will continue to put a lid on asset prices. Have patience.

The volume is extremely low today. Anybody buying or selling out there needs to be very careful. The market will not reveal its true direction until Monday.

I believe that if there is a pullback, it would be more healthy. I still don’t see markets going down big time yet, despite my overall bearish stand. The real stress may come first or second quarter of next year, when banks can no longer hide the ongoing resets of option ARM mortgages. For now, the levitation act performed by Wallstreet may continue for awhile.

I will definitely be a buyer in the gold sector if it pulls back. Tech sector may be another good choice, ASSUMING that Xmas sale is good. The weak sectors will continue to be separated from the general markets, since capital around the world is still chasing quality stocks to avoid inflationary assault.

Hang on tight. Greed seems to be still the word of the day.

Todd Harrison at Minyanville.com seemed to have gone long in Freddie Mac and Wachovia. A few other technicians that I followed also are turning the corner from bearish to bullish. Are we ripe for a rally?

I’m not going to try to catch the bottom here. But there is no doubt that you may double your money in some of the financial stocks if they decide to rally. If you are a nimble trader, you can definitely try. I however will just try to step aside on my shorts when it rallies. I have covered most of my direct shorting of shares. The rest is mostly shorting naked calls that are far out-of-money. I’m going to left them stand, since there are only 3 days left before they expire. But certainly anything can happen.

Intel’s after hour action on Tuesday was positive. It certainly looks like the next intermediate term rally will be led out from tech. Financials will most likely be up too, but they are in the long term bearish market. Although I cannot understand the logic of tech stocks not submitting to the general bear markets, the stock market has proven to bears so many times that it can do many acrobatic tricks.

Let’s take the market a day at a time. It will certainly turn up at some time, provided that there is not a cliff drop waiting out there. I think the cliff should come later though, not now. So let’s hold on to the roller coaster ride once more, and see.

After a big waterfall in the stock prices of Fannie Mae and Freddie Mac, Paulson and Bernanke have taken actions and made announcement before Asia’s opening. They are obviously determined to stop the crisis in confidence to spread further. I think they probably will succeed temporarily.

The markets are due for a rebound, and the rally can be very sharp. Most market participants may think that this is going to be another March low event earlier in the year. However, I beg to differ. I think this rally will last even shorter than the last one, and the eventual fall may be even worse. With the earning season upon us, I cannot see any good to come out of it, until we are all through the worst news.

As I’ve warned last Friday that this coming week is option expiration week. Markets will probably be extra volatile, and I believe the direction will be up. I will probably start covering my out-of-money naked calls, since it’s likely that they may become in-the-money with a strong rally.

But aside from the trading frenzy, remember to keep things in perspective: Indymac (IMB) has just gone under. Downey (DSL) and many others are right behind. Reset of the ARM mortgages is starting in drove, with 300,000 loans to be adjusted. The current state of financial companies is dire. We have 6 months of job losses. State and cities are cutting budget (and jobs and less money for contractors) across the board due to lower property, income, and sales taxes collected. Things are negative, and they won’t turn sunny in a dime. The recovery will take time. In the meantime, one is probably better off staying on the sideline, or just go fishing!

The trading volume for today and tomorrow before the fed meeting should be light just like yesterday. Market participants tend not to bet big before the resolution of the federal reserve meeting.

Obviously, I don’t expect Fed will raise interest rate in this meeting to “combat inflation” as if that’s really their goal. In fact, I doubt that they will raise interest rate in August either. Fed is in a bind between “combating inflation” and reducing the impact from the burst of housing bubble. Unfortunately, I really can’t see what good news Fed can bring to this market. From the recent past talks, markets simply go down further every time a Fed governor opens their mouth. In fact, to be a Fed governor, you really have to be good in talking. How else are you going to talk down the inflationary expectation, while everyone on the main street is getting used to all the fuel surcharges in all kinds of services including pizza deliveries? Therefore, I’m guessing that the main message from Fed this year will be
1. Slowdown will temper down inflation.
2. If (and only if) crude oil stops going higher, the year-to-year inflation contribution from crude will no longer contribute to the overall CPI. (Yes, if crude stays at $130 from today to next June, there is no inflation, or price increase.)

Unfortunately, in the coming year(s), there will be a lot more of cost pass-through from basic materials all the way to the end consumers, since businesses are realizing that high prices of crude oil are here to stay. The cost-push inflation will be taking the rein of the economy. At that time, I’m guessing that the main message from Fed next year could be arguing the pass-through of PPI to CPI will “soon be over” and “not expected”.

As I have argued 2 years ago before the burst of housing bubble, inflation would be almost for sure be heightened for the next decade to come, in order to alleviate a dramatic fall in the inflation-adjusted housing price to a much less price adjustment in the nominal housing prices. The primary goal or the hidden agenda from Fed will certainly be creating lots of inflation, especially the most needed wage inflation (to support housing markets). However, wage inflation is very hard to come by in the globalized economy without lowering US dollar in the process. Poor Bernanke really has got the hardest landing job ever in the US history. He will need to do a lot of double talks, losing his credibility all the way until he gets replaced eventually.

I hope that the markets or PPT (Plunge Protection Team) will do a dead cat bounce again. I have not hedged my long bets enough at all. Earning season is just right around the corner in another month. I’m expecting more dreadful writedowns from financial companies and more economic slowdown from all the companies. Better get out of the way before all the bad news come crushing the markets down.

This guy is Bernanke.

The recent “double” talk between Paulson and several Fed governors have done a great disservice to the markets. The more they talk, the worse things get. They should have just shut up. “Fighting inflation and possibly raising interest rate???” Bernanke is out of his mind. He has no tools to fight inflation. And I will give him a break: half of the rise in crude oil prices are probably not caused by Bernanke’s lowering interest rate.

Anyway. What’s really bad about this market is that both bonds and stocks are falling, and plus the US dollar too. Of course, with bond markets falling, you get a worse housing market by default. It’s simply incredible to watch how the markets fall along with their talk. In one word:

TERRIBLE.

Bob Hoye has certainly been semi-correct that ALL assets will be falling in the “second coming” of the credit crisis. Well, all assets except crude oil so far. You can hear his weekly comments every weekend at howestreet.com.

With US bonds breaking lows (yields and mortgage rates breaking new high), and US dollar coming back down to 72ish range, you bet that foreigners have zero interest in our US-dollar dominated bonds (and full of BS on fake AAA ratings). I truly don’t know how the markets can go back up, except by making another traumatic new low, and put $US on the altar for sacrifice. See, the ONLY way for stocks to stop going down is to kill the dollar. But of course, killing the dollar will also involve a dramatic higher inflation rate to come. Paulson & Bernanke have not much choice left. We have a stagflation in front of us. Unfortunately, this stagflation is unlike 70s. It’s truly going to be worse. I believe we will have more inflation than 70, but less wage inflation than 70. Why? Just go back and re-read my two posts on the most important, and second most important things about investing in the next decade.

The world is NOT coming to an end of course. Everything runs in cycle. It just needs to get worse before it gets better. Unfortunately, many of us will be spending our “prime-earning” years in this down cycle for quite some time, myself included. This era will define our generation.

Looks like my recent calls on markets have been pretty right on.

Back on May 21st, I’ve got out most of my general stock market bets, warning the readers here to get out. My posts are usually out before the market opens, and I, of course, got out on May 20th, with SPY at 141.89.

Back on March 25th, I’ve turned short-term bullish, calling to pick up some stocks if you will. SPY closed at 134.72 on March 24th, and 134.85 on March 25th.

Yesterday SPY was at 136.62.

Did you get the short-term play in the market?

Unfortunately, my short-term forecast for this market doesn’t look too good. This wave down is probably going to be terrible. I’m forecasting that markets will probably AT LEAST match the March low, if not lower.

Yak! Yak! Yeah, too bad indeed.

With the oil prices continue to stay strong, I’m in fact quite worried whether I will be left without much energy stocks going forward. This reminds me a few years back, when I pretty much sold out my energy stocks, and then Katrina hits in the same week, pushing all energy stocks to go far and beyond, leaving me in dust.

In any case, I’ve placed my bets. I’m going to wait patiently for markets to come to me.

Be careful out there. Don’t get your fingers chopped by a falling knife.