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About That Stock Market Rally? Why It Might Be Over After All

|Includes:ProShares UltraShort S&P 500 ETF (SDS)

 What a way to end the week!  The bears, and more importantly, the much feared deflation bird are back in charge.  For how long?

Yesterday, we took stock of the situation, and surmised that while the mini-rally on the S&P 500 had gone as far as it needed to.  So we figured the odds favored a modest continuation upwards.

So far, we sure were wrong!

It's tough to be an S&P bear on a day like today without a nice, juicy short position.  But, that's the nature of trading.  And if we take out the 1040 lows on the S&P, we'll have a nice confirmation that it's "all clear" to get short as this ship goes down, and goes down hard.

So what'd we learn today?

1. Volume expanded, after contracting for much of the recent rally.  That's bearish.

S&P 500 Volume June 4 2010Volume was UP today - as selling pressure intensified. (Source:StockCharts.com)

2. If and when this ship goes down, there is NOWHERE TO HIDE.  No investment are safe.  None.  497 out of 500 stocks on the S&P 500 index closed the day DOWN.

This is what happens during deflationary waves.  Forget "safe" stocks - they are toast too.  Cash is the only safe place to be.

Scared?  Good - you should be.  Now is as good a time as any to review ourdeflation investing strategy.

Are markets now oversold?  Absolutely.  But can they go from oversold to very, very oversold?  Yes - in fact, that's what usually happens in bear markets.  The real fireworks occurs when markets are already oversold.



Disclosure: Long SDS
Stocks: SDS