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Recent Market Action Is Bearish for Stocks and Bullish for Oil

Stocks have come a long way since March on thin volume, and despite lousy earnings quality. The lack of organic revenue growth has been irrelevent, since this rally has been liquidity driven. The lack of fundamental support has left many investors waiting for a pullback, and patiently waiting for something to prick the Mother of All Asset Bubbles (also known as the U.S. equity market).

Monday's market action offered a catalyst: Stocks fell despite bullish news about global manufacturing. When stocks drop on good news, the stage is set for a bearish reversal. Throw in the fear of an October meltdown, and the time is right for a 10% retracement. Today I trimmed my position in stocks, which was already underweight.

Meanwhile, I started to build a position in USO. Oil has been in a trading range for months despite MUCH better fundamentals for global demand. Monday's manufacturing data confirm that an economic recovery is underway, thanks to monetary and fiscal stimulus across the globe. Energy is a great play on a reflation rally, and oil can rise despite a jobless U.S. recovery and rising defaults at banks. I describe how this might play out in The Deflation of the American Dream.

Disclosure: Long IVV, USO.