Party On!

Good Afternoon Folks!

Stocks rallied sharply today for absolutely no reason at all! The Obama hope rally continues. I must admit I am surprised by the size of the move. The DOW actually closed above 9000.

I think this is an interesting level because we are getting near the higher end of the trading range that we have found ourselves in over the past month. The move today was on extremely light volume so you really can't read too much into it.

As for news, it was a quiet day although we did get the ISM mfg number which showed US manufacturing shrunk as orders hit a 60 year low:

"Jan. 2 (Bloomberg) -- The decline in U.S. manufacturing deepened in December as demand for such products as cars, appliances and furniture reached the lowest level since at least 1948, signaling further cutbacks in factory jobs and production this year.

The Institute for Supply Management’s factory index fell to 32.4, below economists’ forecasts and the lowest level since 1980, from 36.2 the prior month. Readings less than 50 signal contraction. The group’s new-orders measure reached the lowest level on record and prices slid the most since 1949."

My Take

How do we rally 3% after seeing data like this? I continue to be amazed by this market. As I said last week, be nervous if you are short when the market starts ignoring bad news. Some of the greatest rallies in history occur during bear markets.

We were due for a bounce after selling off so sharply last year. It appears the Feds spending binge has calmed the market down for the time being. The VIX continues to drop as the market breathes a sigh of relief. This will create a wonderful shorting opportunity once everyone realizes the Obama stimulus will do little to get us out of this mess.

Recommended Reading

If you have a moment, take a look at this excellent commentary by Prudent Bear's Martin Hutchinson.

I have been talking a lot about deflation recently, but I think its important that we all keep an eye out for inflation down the road. Note in this commentary that the money supply grew by 1000% in the 4th quarter as the Fed went on a spending binge bailing out America.

Deflation rules the day for now, but the inflation risk that's been created by all of these bailouts must be respected down the line. One pigmen that I highly respect told me the next leg down in the markets will occur when the Fed is forced to decrease the money supply back to normalized levels when inflation rears its ugly head.

I am not too worried about that right now because the deflation and debt destruction now overwhelms any inflationary risks. Just some food for thought here.

Torches and Pitchforks 2009 Style!

Well I don't see any pitchforks on this video, but you get the point. This is the scene from Iceland yesterday as the country continues to suffer following their economic collapse. Icelanders are angry and now rising up. Their Prime Minister had to be rushed out during a TV interview two days ago when an angry mob tried to break into the studio. If you thought this couldn't happen in today's society think again.

We could see it here if we continue these bailouts without the money to back it up. This is what happens when a country defaults on itself folks. Lets hope this never happens here.




Bottom Line:

Next week will tell us if this rally has any real legs. I am not convinced. We get employment numbers next week, and if the news continues to be terrible we could selloff again.

That being said, a hope rally heading into Obama's inauguration is very much on the table. I actually put a few shorts on today. I bought some QID calls and some SPY PUTS at the end of the session. I hedged it with some TBT.

My thought with TBT(short treasuries) is if we continue to rally then money is going to start coming out of treasuries and into the market. Monday should be interesting.

Stay Tuned!