This is a monthly chart of the S&P 500 from 1970 to present (August, 2009). Also shown is the 150-month moving average. The ordinate is logarithmic.

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After the near-collapse of the US banking system, and the attendent freeze in the credit markets, and the multi-month crash in equity markets that took the S&P 500 from over 1500 to under 700, many still doubt the 5 month rally that has since ensued. They seem to be waiting for a retest of what Barry Ritholz referred to as "generational lows." My opinion, don't hold your breath.

If you're assuming that the year-long recession is merely the beginning of the next great depression, statistically speaking, you're making an improbable wager. The more likely outcome given the massive governmental action is that we've experienced a severe recession that is already bottoming.

Since March, all these charts look good. Too good. Market momentum is fading along with volume. Small caps have rocketed off the March lows. I tried the short side with double-short IWM (TWM) today. Didn't work.


The financials led the stock market off the March lows, as fears of a full-fledged financial collapse faded. However, the financial ETF (XLF) looks highly overbought for now. A pullback here could accompany a broader market pullback, as financials often lead the overall market.

Below is a weekly chart of the S&P 500 beginning in 1994. Clearly evident is the straight up move of the mid- to late 1990s, the 2000-2002 bear market, the 2003-2007 bull market back up to previous highs, and the 2007-2009 bear market, back down to 2002 previous lows.

Forgetting for a moment about all the complicated underlying fundamentals that drove each leg of the up and down cycles of the past 15 years of US stock market activity, if one were asked to forecast the stock market direction of the next 5 years, many of us would state the the market might just return to the previous bull market peak of S&P 1500.

Below is the complete text of Barack Obama's editorial in the Washington Post (Rebuilding Something Better) yesterday. My comments are in italics.

The high volume sell off today suggests to me that the market is headed lower for a while. I bailed out of my trading postions in EWZ, FXI, OIH, and QQQQ. I sold FXA, FXC, and FXE higher last week. I'm 100% US Dollars, and, except for trying to flip an oversold bounce, will be doing a lot of nothing in the markets this summer.

As I see it, the financial markets baked in economic armageddon by March, then baked in economic recovery by June. The truth seems to lie somewhere in between.

I had set out to write a more lengthy article, but I'm tired and I'm sure you're tired so I'll stick with bullet points.

OIL: Over-priced relative to current economic conditions, but, supported by a weak US Dollar, Middle East tension, and increasing demand in Asia. Bottom line: I don't see higher oil prices unless the US Dollar weakens further or there's a crisis. Downside probably around $40, upside $80 in the absence of significant economic recovery in the US. However, I believe oil is indeed a new currency.

Many have noted the inverse relationship that has existed since the previous bear-market lows of 2002-2003 between the US Dollar and stock and commoditiy prices: to wit, the US Dollar declines as stocks and commodity prices rise, particularly gold and oil.

Since the crash of stock and commodity markets began in earnest in the Fall of 2008, this relationship has played itself out on a near daily basis, as opposed to a general trend. Indeed, as stock markets crashed the US Dollar spiked higher, and as stock markets recovered the US Dollar sank.

No, I didn't come up with that gem of a title. It's direct from Todd Harrison of Minyanville. His working hypothesis has been that stocks and commodities go up when the dollar goes down, and, vice versa. It's working beautifully since the previous bear-market bottom in 2002-2003.

Anyway, the US Dollar Index continues to drip below the multi-decade support level of 80, being particularly weak against the Aussie (FXA), Euro (FXE), Loonie (FXC) and the Brazilian Real (BZF). The Aussie in particular is up nearly 30% since the March lows, nearly equaling returns in the equity markets.

Somebody is relieved about the "stress test" results; that, and the "less horrible" unemployment report may have catalyzed another 2% squirt up in the US equity markets. Financials were up another 7% as a group.

Sadly, those US Dollars in our pockets and bank accounts, which denominate our stocks and bonds, lost a couple percent today; some say that with the recent near-failure of a Treasury auction this week, and the rise in long-term interest rates, the Fed will be forced to start buying lots of Treasury Bonds (quantitative easing).

The WHO raised the "phase" of the pandemic alert to "Phase 5" (Pandemic). This struck me as odd, given that the stock market has already declared this rapidly spreading pandemic a "non-event." The "flu trades" have already reversed, and traders have moved elsewhere.

The authorities are trying to rename this flu "H1N1" instead of "swine flu," due to protestations from the pork industry. "H1N1" refers to specific subtypes of viral proteins the virus expresses and uses in its replication and infectious cycle. l am partial to my name for this virus: the "Mexican Flu of 2009."

Monday afternoon on CNBC's Fast Money, Guy Adami said "the flu trade is over." Guy was referring to bidding up a basket of pharma and biotech stocks that could benefit from a flu pandemic (drug and vaccine stocks), and, shorting stocks that would be hurt by same. Guy is a terrific trader and for the time being I wouldn't doubt him.

That being said, there's a potential reality that the market hasn't priced in yet: a severe, economically crippling flu pandemic. In my previous article yesterday, I described some of the basic virology of the Mexican Flu, and left it at that. I stayed home today, ironically, with a cold, and had a chance to watch a segment on "The Situation Room with Wolf Blitzer" featuring Dr. Ira Longini.

My pseudonym is accurate. I am a practicing physician. As such, I thought I'd share my understanding of the emergence of this new "Swine Flu" outbreak. I'm not a virologist, nor an infectious disease specialist, but the story of this influenza outbreak seems straightforward enough.

Influenza viruses seem to percolate and transmit in animal populations such as birds (avian) and pigs (swine), and periodically acquire the ability to infect people (such as SARS). Viruses tend to mutate quickly, and this is why the flu vaccines we make each year change: the viral antigens (proteins or glycoproteins that our immune system can "see") change from year to year. So the vaccines have to change too, enabling our immune system to "be ready" for the mutated viruses.

Volatility historically still high but coming down which is bullish.

The US Dollar has rallied off its lows and is consolidating at higher levels. The story for the past decade has been: lower dollar correlates with higher asset prices, and vice versa. If the US dollar does resumes its decline, asset prices would be expected to go up (inflate, lol).

Below is a table originally published August 13th, 2007 by Bespoke Investment Group. According to the authors, this screen filtered for "the S&P 500 stocks with less than 25% debt to equity that have the lowest price to book ratios."

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I'm watching the CNBC special "House of Cards" about the origin and evolution of the mortgage crisis which morphed into the credit crisis.

Simply put, once mortgage companies were able to sell mortgages to Wall Street, instead of Freddie and Fannie, and Wall Street packaged those mortgages as the "same" Mortgage Backed Securities with AAA ratings, the game was on.

Stock index futures were rocketing higher this morning off of Well Fargo's (WFC) "earnings beat." The significance of this is open to debate, but the shorts are scrambling for cover, no doubt.

I found several other pieces of data released this morning far more telling of the current economic, and hence corporate, conditions.

S&P 500: Back to 800 level of previous consolidation.
Oscillator: Market as overbought as it has been in years.
VIX: Volatility coming down, bullish, but is it sustainable?
FXI: Yes it's China. No it doesn't track Shanghai. I'm long.
EWZ: Brazil ETF heavy in PBR and RIO. I'm long.
EWH: Hong Kong ETF, a powerful thrust off the bottom with the China/Asia theme.
Looking for intermediate-term themes, it's back to China, Asia, and Brazil. I'm neutral on US Markets noting that they're highly overbought (as are my current positions as well!). I'm looking to add to EWZ, FXI, and EWH on an anticipated pullback.

Disclosure: Long EWZ, FXI, EWH.

President Obama has rejected the reorganization plans submitted by General Motors (GM) and Chrysler Corporation. Obama fired GM's CEO, Rick Wagner. The company has 60 days to submit a more "acceptable" restructuring proposal in exchange for more of our taxpayer money (Government aid).

This coincided but did not necessary cause stock and commodity markets world wide to fall another 2-5% across the board. Hardest hit were the financials. Bank managements across the country must be wondering if GM's fate is prologue to their own.

Ok, so you missed most of the money on the short side the past couple of months, and, sitting on your hands, like me, you missed most of the explosive 20% upside move in the past 2 weeks. Now what? Well, my friends, the "easy" trades are over for a while.

The S&P 500 is right back around its "magnet zone" of 800, the financials have had a blistering rally and now flop around 10% per day, and oil has run up from the 30s to the 50s. The US Dollar has dropped, spiked, dropped, and spiked within the past year.