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Being bullish on the equity markets this year has been a rather harrowing experience, perhaps more so in the last four months where major market indices have tried on two occasions before to breakout. Will the third time be lucky? Well, we think so. Quietly beneath the scenes while everyone has been transfixed on the Dow and S&P and perhaps the Nikkei, stocks outside the US and Japan have been etching higher, especially stocks of so called emerging markets.

Every bearish reason in the book has been thrown at the US equity market over the last four months including the media buzz words "deflation" and "double-dip." The press of popular opinion has had a field day with negative "news" items. For four months all we have "herd" of is problems/crisis/drama in a never ending soap opera. It was almost as if the press has a hidden agenda. Perhaps as a direct result market sentiment in July and September reached the same bearish extremes as it did in March 2009 and October 2002.

Yet, in spite of everything that has been thrown at the market, the major market indices are currently trading in the upper bounds of their trading ranges. I guess, in light of all this, if you are a genuine bear (actually have short/bearish positions in the market) you must be worried right now. What is it going to take to push the major market indices lower?

The 2450 level on the Value Line is one monumental level. I think if it closes above that level, a very significant short covering rally will ensue. Of course I cannot sit on the fence ... a breakout is imminent due to what is happening on the emerging market and junk bond front.

The behavior of emerging market small caps is certainly not befitting of a bear market. Yet the behavior of "rats and mice" emerging market equities has been completely overlooked by analysts and economists alike. Note carefully, the behavior of emerging market equities, and small caps in particular, are highly indicative of global liquidity/growth conditions. You will pick up problems in developed equity markets first in emerging market small caps.

Finally, some sort of correction in US Treasuries appears to be underway. Whether or not this results in the yield of the 30-year breaking above the key 4.1% level remains to be seen of course. But let me say this, "fundamentals" are becoming less supportive of low Treasury yields by the day. But there is no growth and no inflation to warrant bond yields going higher? Well, think again

Just as yields of US Treasuries start to take off so too are junk bond prices. Well in any event why are junk bonds trading at multi-week highs? Surely if cashflows (profits ... growth) were drying up you would not want to be invested in highly marginal junk grade bonds? Well, maybe the behavior of junk grade bonds is a "red-herring." But if it was, shouldn't commodities be on their knees?

Well you judge for yourself as to whether or not the CCI (and equally weighted index of 17 commodity futures) is looking bullish or bearish. To me it is rather obvious. For whatever reason takes your fancy we have a broad based advance in commodities. This can mean either inflation or world growth or some combination of the two. Either which way this behavior is not supportive of moms and pops making money by being crowded into US Treasuries. This is a highly toxic fundamental condition for Treasury holders.

Just getting back to reasons as to why commodities are rising ... what strikes me as bizarre is that all of a sudden there are a power of reasons as to why individual commodity prices are rising (dramas in India and Russia for example with respect to crops) but no one is coming out and saying "hey isn't it rather strange that every commodity has been rising dramatically over the last few months?" I think that there is something far more macro/systematic at play here, crop problems in Russia is mere icing on the cake.

And now off goes silver. It has paid its dues, it has been locked in a trading range for some 12 months. It appears as if there have been some very desperate short sellers doing their utmost to keep the price of silver down. All I know is this - the longer a market moves in a sideways direction the greater the intensity of the breakout. I think we now have that breakout. Again the chart below suggests on no uncertain terms an inflationary condition is taking hold, yet I continue to hear "deflation" bantered about. Am I completely missing something?

Are you bullish the euro? Well if you are not then by default you are bullish the USD. I can find no evidence of bullish commentary on the euro. Thus by default there is a lot more downside left in the USD Index. Goodness knows what is install for deflationists if the USD Index drops below significant "support" at the 80 level.

That pesky yen continues defy logic, although maybe you shouldn't be surprised to see it at 15-year highs against the USD. If you look at the AUDJPY cross the yen hasn't really gone anywhere. In any event, note where the AUDJPY is currently trading. It is ever so close to the key resistance levels. It seems everyone thinks that the Japanese ministry will not intervene after all they have done nothing in 6 years what makes one think that they have the resolve to do anything now? Well if there is one thing that I have come to learn and respect in my short 15 years as a professional trader - expect the unexpected and you probably won't go too far wrong.

A bull market creeps up on you when you are least expecting it or at least highly skeptical. Remember those immortal words of wisdom from John Templeton - bull markets are born in pessimism, grow in skepticism, mature in optimism, and die on euphoria. All I can smell that is remotely optimistic is a whiff of hope!

Disclosure: Author long DIA, EEM, DGS, TBT, JNK, UDN, DBV, GCC and SLV

Source: Bull Market Continues, But Is Breakout Imminent?