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Some Kinks (in the Armor) on Today's Bullish Action and some Interesting Links

|Includes: IYT, XHB, Financial Select Sector SPDR ETF (XLF)

The economic information we got today was quite bullish.  Manufacturing activity is in full swing as automakers are the main beneficiaries of the inventory bounce.  

Just a few bearish thoughts though to sprinkle in.  Given all the good news we got from China and US manufacturing, all we mustered up on the indices was a sub 2% gain. They seem harder to come by these days.  On a day like this, one would figure a 3% plus day would have resulted.  In addition, China, the leader of the global recovery hasn't even broken it's Aug '09 high.    

Volume once again was pitiful and homebuilders lagged the whole way.  Financials continue to lag and while this rally had them move up, they are still not confirming the move higher as they haven't done squat since Oct.  

The DJ transports have been trending downward the whole Santa Rally.  

These are just some bearish signs of non-confirmation that I see.  While they may correct as the markets move higher, they are some important details that need to be resolved.  

From an Economic perspective, we still have lots of data coming up.  And by weeks end we should know the short term move the markets choose to take.  

From a longer term perspective though, my bearishness continues.  While corporations could show substantial increases in profits due to all the cost cutting helping out margins (a short term boost for the markets), investors will be disappointed that growth in earnings will not materialize in Q4 '10 / Q1 '11. If, however, economic growth does indeed begin to pickup, there will be a number of increasing formidable headwinds facing this "recovery" which will lead to a case of stagflation.  The main headwinds I see influencing the most are: interest rate increases (the bond market will force the feds hands if indeed we are in a self-sustaining recovery), higher commodity prices, and continued credit contraction on both the side of banks and consumers.  

However I am on the side of "no recovery" to "double dip recession" camp for various reasons.  Lack of end demand will impede the economic recovery as unemployment stays elevated and deleveraging continues.  Housing, the crux of the crisis is still in very fragile state and some indicators have shown that we might indeed be beginning the next leg down (Mortgage Applications, Homebuying Intentions: Conference Board of Indicator/Consumer Confidence, LoanPerformance Housing Prices Indicator).  Financial companies will continue to restrict credit growth and households will continue to show low demand for credit as the deleveraging continues.    

These factors will begin to play out come Q2 through Q4.  If the market is a forward looking indicator by 6-9 months, we should begin to see some weakness in Q1/Q2.  We are already seeing it in Homebuilders (XHB - Top was in Mid Sept) and financials (XLF - Top was in Mid October)... a clear cut bearish signal would be if they broke out of their trading range to the downside.

In Addition, here are some Links that I though were interesting...
We are seeing a decent lineup of economists worried (FeldsteinKrugman, and even Stiglitz) about a possible double dip.  Given the fact that very few economists are forecasting such an event and the consensus calls for growth to slow growth in 2010, look out for this being a contrarian play.   

Disclosure: Short Financials, Real Estate, and Commodities