When I wrote last week that it was safe to sell, I should perhaps have checked the options tables first. Although the S&P index options that are favored by the institutional set were heavily tilted in favor of calls, the options on the SPY ETF were massively imbalanced in favor of puts. Over two million put contracts by my count went to zero last Friday after two little sudden pops in the SPY out of nowhere - one Wednesday morning, one Friday afternoon at about 2PM. Okay, so maybe the pops weren't out of nowhere (details on my website).

Nevertheless, I sold the last of my unhedged SPYs Friday, and have no regrets. I do expect that yesterday's big reversal - from up 155 on the Dow to down 85 - is the beginning of the spring correction, though I don't believe it will be straight down. The market will

We have gone from silly to farce in the space of an equity week, and it is now officially time to begin selling your flex money in earnest.

What's been behind the manic stage is self-begotten momentum, a liberal dash of carry trade unwind, and one rather tepid employment number that has completely bamboozled much of the media. The main virtues of the last item are that it's easier to understand, wasn't negative, beat consensus, and wasn't good enough to scare off the Fed. It wasn't large enough to keep up with the natural replacement rate, either, nor large enough to catch up the first four months of this year with last year.

Though none of the TV hype is true, that doesn't mean that the stock market can't squeeze higher. The last couple of days have seen some nasty short-squeezing as some throw in the kitchen sink in an

As equities endured a daunting correction Thursday - the S&P was down around twenty-five basis points in morning trade - the question only naturally comes to mind over whether to buy this fearsome dip, or to move to the sidelines and wait for something huge, like a one - or even (God forbid) two-percent correction.

Let me pause a moment and confess that I have been a double agent of late. On the one hand, I have constantly been remarking about the contrast between ebullient headlines, equity prices and weak, even deteriorating economic fundamentals. On the other, I have been steadily predicting that equities were likely to continue their march to new highs in spite of an increasingly rickety foundation. Even so, a spring correction would still come.

Now the heights have been scaled - 1600 on the S&P, 15,000 on the Dow. Breakout, or last gasp before Armageddon?

The

If you've ever been to any sort of live performance theater, you know that as the show is about to go on, or back on, the house lights will start to flash to warn patrons that it's time to get back to their seats. There's usually a stated policy that they flash at a fixed number of minutes before the performance resumes, but in truth it isn't that exact. It could be a minute early, or more likely a minute or two late. That's where we are with the stock market now - the house lights are flashing to take your seats, but the exact minute isn't known.

The April high would seem to be upon us, but I wonder if Tuesday's close of 1597 was the seasonal top. Failed runs to magic levels aren't all that exceptional, in my experience, but the Street does like to climb the last

One of the reasons that people are going to end up mad at the market again is the constant disconnect between the business news and economic reality. One is used to a divide between the stock market and the economy, as the two seem to intersect only occasionally, but when the market rise is accompanied by a steady chorus of voices singing the praises of both stocks and the economy, the feeling of being deliberately cheated ends up being the aftermath.

I can understand the short-term pressures that drive many on-air "editors" to describe events in a manner usually used by sellers of real estate. Rising markets mean better ratings. There also seems to be some sort of guideline in vogue that if the talking heads can be sufficiently positive, they might distill some of the magic elixir of confidence into people's minds and encourage them to spend and invest

The March jobs report was a lemon, the retail sales report a lemon, European car sales were a lemon, Germany's car sales an even bigger lemon and Egan-Jones downgraded the country's debt rating. The latest GDP data out of China was lemon-flavored. That's a lot to absorb in a few days, leaving little wonder as to why the market has moved back into a negative position for April.

Despite the weakness, though, I don't see this as necessarily the beginning of the spring sell-off. It might be, but mid-April weakness isn't unusual, especially on the heels of tax day. The markets wobbled in 2012 and 2011 at this time of month before bouncing back to finish the month with a rally. Even in the dreary years of 2008 and 2009, April was able to produce decent rallies.

The last time April was unable to come through was 2004, a

Another April, another low-volume rally. Junior writers will struggle with their leads for explaining Wednesday's rally - maybe it was because Chinese imports were higher than forecast. Or perhaps they were cheered by evidence the Fed will remain accommodative.

Maybe they'll say that investors are encouraged by the prospects for first-quarter earnings. So far, the ratio of negative to positive warnings for the quarter is about five to one, the worst since the fall of 2001. The consensus estimate for earnings growth has fallen to about minus two percent. Of course, that means the Street is really expecting something along the lines of three to five percent - have to have those earnings "surprises," after all - but after share buybacks and inflation, there isn't much real growth left to speak to justify that 18 times multiple.

Before you object on the grounds of forecast earnings, I haven't forgotten that

Let me begin part II (see part I here) by addressing the short-term outlook. Wednesday was a good-sized pullback, but two of the previous three days were new all-time nominal price highs for the S&P 500. Much of the selling is probably due to the first quarter: the media may talk of traders trying to protect profits, but after a big first quarter like the one we just had, some significant quarterly asset reallocating is bound to follow. Last year's big 12% gain in the S&P led to a similar sell-off in stocks as institutions re-weighted, pulling the average down briefly below its 50-day exponential moving average (EMA) before it rebounded.

The current 50-day EMA on the S&P sits at about 1527, or a bit less than two percent away, with the 1520-1525 appearing to be some sort of probable area of support. That's only about three percent from

It's always amazing to see the extent to which a rising stock market can beguile minds. The mistakes of the past are forgotten - hence the Reinhart and Rogoff book, This Time is Different, by no coincidence the market's frequent rallying cry against the lessons of history.

Evidence doesn't only get ignored, it gets rewritten. Consider the story in Tuesday's Wall Street Journal, claiming that "the longer-term picture is of businesses steadily increasing spending," dismissing the February pullback (it fell 2.7%) as inconsequential and dwelling on the fact that the three-month moving average has risen since October. Indeed it has, though as it goes up and down all the time with the rhythms of stock and destock, it doesn't mean that much. Of far more weight and interest is the year-on-year change in annual (trailing twelve-month) spending.

(click to enlarge)

source: US Dept. of Commerce, Avalon Asset Mgmt

A couple of weeks ago I wrote an article expressing fears about the equity market. While I would rather be writing about why investors should be piling into the market, I feel compelled to take up the theme again. There is reason to read on.

One of my more lamentable habits is that of checking my smartphone in the middle of the night for news from abroad, as well as indications in the futures markets (although it must be said that some stories are very helpful in retuning to sleep). I also check the futures market and European markets again immediately upon rising.

What plagues me of late, thanks to these nocturnal habits, is the sensation of disconnect between the rest of the globe and the markets. I've experienced this feeling before, and cannot remember a time when it didn't end in a bad way. Obviously one has to make

Many of you may have noticed that the issue of what drives stock market returns has made its way back to feature-article status again, as well it might. One resumé of the arguments appeared recently in the Economist, and noted manager Jeremy Grantham of the investment advisory firm Grantham Mayo also wrote about it in his fourth quarter letter. Stock returns don't correlate very well with GDP growth, nor do they necessarily turn on corporate earnings, nor even on anticipated growth, as one might think.

Indeed, there isn't any magic rule about investing - if there were, it would immediately come to grief from overuse. Valuations matter, in that it's much easier to lose money from very high valuations and profit from very low ones. But the definitions of what constitutes "high" and "low" are in perpetual dispute, complicated by the built-in bias of the asset management industry

I fear for this market, I really do. I also fear for the pigeons flocking in for its last stages. They will enjoy some gains for a few months, and then get plucked all over again. How long we can go on like this and maintain a real stock market, I don't know. Volume has already been mediocre for this rally, leaving me to wonder if there will be any at all left to accompany the rise from the ashes of the next rebirth.

This is not an article about the end of all things and the necessity of going to gold and diesel fuel. It's an article on the growing likelihood of an increasingly contrived rally coming to a bad ending. I didn't believe in the likelihood of such an outcome as recently as a couple of quarters ago, but we seem to be headed for it now. However,

The economy is showing gradual signs of improving, said the Wall Street Journal, which is having a bit of bad luck with headlines this week - it led Monday's "Money & Investing" section with a headline proclaiming that "surging stocks put bears on heels," only to see the market take the biggest one-day drop in stocks since early November.

The recent drops and volatility are warning signs, but don't mean a stock market fall is imminent - depending on your definition of the word. If the time horizon is three to six months, then a fall is imminent, make no mistake. But it's three to six days, about the time span of a conservative trader, then no.

There are several reasons for the market to sell off within the next three to six months. To begin with, the calendar trade is usually weak in May and June. It doesn't

The fuss over the FOMC minutes has brought several issues to the fore, some more obvious than others. An excuse to take some profits from an over-extended rally is at the top of everyone's list. It was also a useful reminder that the dominant guide in the market is still central bank accommodation. Nearly all of 2012's gains could be attributed to days surrounding market-friendly statements from the European Central Bank and the Federal Reserve. In the absence of bank action, the default is to trade the calendar.

Another point that emerged from the minutes is that the Fed is, in effect, feeling its way through the current economy (viz. Mohammed El-Erian's latest on the central banks - "pursuing too many objectives using tools that are too few, too indirect and too imperfect"). No one knows how all of this is going to turn out, the Fed governors included. As

There's a bit of foreboding in the air as we round the halfway mark in the first quarter's run for the roses. Many analysts of the more fundamental sort are frustrated and flummoxed by a market that seems nearly bulletproof. Despite a run of economic news and corporate earnings releases that are modest at best and often lean towards the weaker end of the scale, the din of the rally seems to drown out all else, leaving a stream of pandering press articles and fawning comments in its wake. It seems the market has reached the defiant stage.

The professional community is divided. Without doing a roll call of the luminaria, it seems to me that there is a division into two camps, ironically with the common ground that neither expect the economy nor earnings to do particularly well this year. One group, prominently exampled by hedge fund manager Bridgewater

This is really getting to be a pattern. For the fourth year in a row, or every first quarter since 2010, we are being treated to some crazy momentum rally while being told that great things are happening in the economy. Clearly they must be, or else the tape couldn't be up, concludes the business media, ignoring with a touching constancy the old maxim that the tape makes the news.

One of the larger contributing factors has been the issue of seasonal adjustments. They've either been wrong (Q1-2011) or weather-aided (2012) or just better than hoped (2010). A large part of the media and public gets taken in every time by stories about the economy reaching "escape velocity", yet nominal GDP has been remarkably consistent the last three years: 3.8%, 4.0%, 4.0%. The main variations have been from changes in the price deflator and quarterly swings in expenditure patterns around

The press reports attributed the very mild market decline Wednesday to the GDP number and the Fed's assessment on risks to the downside, but I don't believe that either had much to do with it. The S&P 500, after all, was in the green mid-morning, hours after the GDP report. It was really just another classic trading day of buying the market up to the Fed report, then selling it afterwards.

The market is still overbought and so vulnerable to a little end-of-month selling that is actually a bit overdue for January. As hard to believe as two down days in a row may seem, I would like to draw your attention in particular to a weekly claims number that has a chance of showing a big increase Thursday morning. I dislike and try to avoid making such predictions as a rule, as guessing an individual number is such an

If you're serious enough about investing to be reading this, you're probably aware that the S&P 500 briefly poked through 1500 yesterday. The first attempt at such levels is usually swatted away, so don't despair if you're long. Traders will want to give it another try. If you're wondering whether it will be back soon, the answer will probably depend on the new home sales data Friday morning. It had better poke through quickly, or it could take two or three weeks (or even months) longer.

The biggest impetus to a market that's been dying to break through the magic number, but hasn't gotten the help from earnings yet, has come from consecutive weekly jobless claims reports that have many black boxes clicking away and many analysts mystified.

The previous week's big 10% drop was made possibly by the largest seasonal adjustment factor in three years. Unadjusted claims were up

Looking at a chart of the S&P 500 over the last ten days, you have to admire the market's pluckiness. The last five days in a row, stocks have opened down, only to pick themselves up back off the mat. Since last Thursday's close at 1472.12, the S&P has managed to move up fifty cents, while spending nearly the entire time below that level.

In the ten days since the Great Leap Forward on January 2nd, when a wretched frog of a compromise was transformed into Prince Charming (recipe: fill a large crock pot with HFT and algorithm; season heavily with sheared shorts. Put lipstick on the frog and bring the mixture to a boil, all the while singing "Over the Rainbow." After reality has evaporated, remove the Prince and live happily ever after*), the S&P is up about seventy basis points. It has wandered below the previous day's close

I would like to recommend two pieces to you, one being Howard Marks's (Oaktree Capital) client letter, and the other being Jeff Gundlach's market outlook for 2013, which should be available sometime Thursday on the Doubleline website. The latter is a useful antidote to prevailing wisdom, while the former is a powerful reminder of the role psychology can play in trumping fundamentals. Merely recognizing illusion isn't enough to navigate it successfully.

One illusion I've been seeing a lot of lately is how the global economy is doing so much better. This came as quite a surprise to me, yet the JP Morgan-Markit Global PMI was indeed released last Friday with the bold headline that global economic growth was at a nine-month high. A picture is worth a thousand words, so I strongly suggest that you click through to the report and look at the graph on its