The trading action over the past two days has looked like two giant bumps in the road. A steady climb up, some rounded tops for a few hours, then a persistent decline towards a marginal close. Many market watchers were thrilled to witness an intraday passing of the record high on the S&P and while the last two days have been disappointing, the bulls and financial media are doing their best to assure you that it’s no big deal. Bob Pisani of CNBC has repeatedly issued his personal assurances that a new S&P record is a certainty over the next few days. I am not quite sure of anything about the markets lately so I am impressed by the bulls and their conviction.

One part of the constant bullish “buzz and hum” is that skepticism is over the top. I have written about this phenomenon before, so I’ll just sum it up - bulls love to tell you about skepticism but I hear much more from them about it than I do from actual skeptics. Yes, short interest is at record highs and I wish that was not the case. I’d like to compare it to some prior instance but the number of hedge funds and the capital they are employing on the short side is much larger now than any other period so I just don’t know how to judge short interest. Market sentiment indicators are interesting, but their predictive ability is not very good. Like the VIX, many of these measures of supposed fear, greed, complacency, anxiety, etc. etc. seem to either be stuck in a rut for long periods or fluctuate so dramatically that they predict everything and nothing at the same time.

Last week, my signal work was consistent with an upward move in the market for the first time in a while. Lately, it seems like my picture of the market is upside down and opposite to the index. This week I gave 291 new UP signals vs. 91 new DOWNs. However, most of the stocks I expect to head higher were represented by Mid and Small caps with only 17 Large Caps. To say the least, I was not impressed with the leadership.

Time will tell whether the last few days are just minor bumps in the road or the kind that give you a flat tire. On the backs of the new UPs this week, the HEDGEfolios Timing Indicator had an improvement in the bullish reading but as a whole, I am still firmly in the bearish camp. Gas prices and interest rates are on the rise and yet, the market is still humming along. That’s very impressive, but most impressive things in the market are abnormalities that eventually revert to the mean or historical norms.

Some warnings work, others do not. In the Revolutionary War, colonists warned of the approaching British forces with lamps and it worked. As a contrast, warnings of Japan’s potential attack prior to Pearl Harbor did not work. In more recent history, we only have to look to the debates over 9-11 and Hurricane Katrina to see the importance of warnings.

Here are a few factors affecting their success:

• Precision - a warning’s specificity. If the warning does not include enough details, the audience will have trouble figuring out what to do.
• Newness - new and infrequently used. Chicken Little and “The Boy who Cried Wolf” kept repeating their warnings so often that no one took them seriously.
• Immediacy - a short amount of time between the cautionary expression and the beginning of the event. If a warning is given too long in advance, the audience will likely forget about it or become even more complacent as time passes and the event does not occur.
• Expectation - a person’s belief that the event is possible, probable, or likely to occur. When the person has a prior disposition to believe the event may happen, they are more likely to be ready to take action when the first signs appear.
• Loss - a person’s fear of loss from the event’s occurrence. Having nothing to lose or all to lose will change the sensitivity to the message.

In market history, there are thousands of failed warnings that violated one or more of the above conditions. The first three are the responsibility of the forecaster and yet, the last two are equally important. I have given a few warnings on this site even when I recognized that investors were not ready to receive the message. I am doing it again and yet, I have few details, I have warned before, and I don’t know exactly when a sell-off is coming. Consider yourself warned…the rest is up to you.

Along with my new bullishness on oil, I am revising my expectations for the broader basket of commodities. I think support was found near 310 on the CRB index and I am looking for raw material prices to head higher.

  It was only a matter of time before $3 per gallon gas would bring out politicians and their need to investigate and now legislate “gouging”.   Let the pandering for populist votes rage on!  CNBC had on Rep. Bart Stupak (D-MI) who is supposedly looking out for all of us innocent gasoline consumers with gouging legislation. I don’t know what is going to cost taxpayers more - supposed gouging at the pump or the government’s oversight and policing. At one point, Rep. Stupak suggested that we need to inform consumers what each penny being paid for gas is going to. I seem to remember seeing little stickers at my station telling me what percentage goes for crude, refining, distribution, retail profit and that other big part, taxes to the government. What do we need more than that? Maybe we should have to sign an affidavit for each purchase stating that we received a drop by drop accounting of the gouging that is or isn’t going on. Rep. Stupak also threw out the old favorite of saying that one gas station should not be able to sell gas higher than the gas station across the street.  Seems to me that we are supposed to have a capitalist society.  You can, in fact, decide for yourself to cross the street and not pay the higher price.  And what about collusion?  From time to time, the government has made claims that gas stations were fixing prices.  Now we seem to want to punish anyone that has different prices.   Gouging certainly happens.  And when it does, consumers have choices.  They can either buy less gas or buy it elsewhere and when the gouging goes away, they can choose to avoid the gas station that did it to them before.  I know populist views and the growing socialism says we need more government to protect us, but we all have the ability to protect ourselves.

I am no longer bearish on oil prices. In my May Market Forces post, I had expected a decline and the factors that I thought would remain moderate during this month have not held. Instead, we have continual supply issues at refineries and more importantly, excessive demand from the gas guzzling public. Technically, the chart on oil is looking like there is a high probability it will break through resistance at $66.50 per barrel. Any increase in geopolitical issues will be like throwing gas on a fire (obvious pun intended.) NOAA is coming out with its 2007 hurricane forecast on May 22nd. It will likely be consistent with Colorado State’s forecast of a bad season. It seems that La Nina patterns for this summer are on the way which supposedly bring cool Pacific Ocean temps and high Atlantic water temps. Note that their forecasts for last year’s hurricane season were not good. Some (like the excuse-hungy retailers) would argue that their expectations for a warm winter weren’t so great either. But oil traders react to what the weatherman says so right or wrong, chances are hurricane paranoia will provide strong bids to oil prices. As for the demand side of the equation, American consumers cannot help themselves. Now that driving season is just around the corner, watch for those AAA travel reports to come in with record road trips.

Leading “gurus” like Abby Joseph Cohen will tell you that the weak US dollar is icing on the cake for equities to head higher. This earnings season foreign currency translation gains in the financials of America’s largest companies contributed greatly to the numbers that investors seem to love. We also keep hearing how wonderful it is for our firms to be able to export goods into markets with stronger currencies. While all of this may be true, it is not true forever. There comes a point where a weak dollar isn’t such a wonderful concept. Please read this great commentary from Axel Merk and you might just believe what we are saying.

Our Congress is advancing protectionist policies and as much as people like to pin this entirely on the Dems, that is no longer true. Republicans are playing along or just rolling over in this ridiculous pursuit to get votes for the sake of saving jobs and with the false hope of creating jobs. I have been consistently saying on this site how much I want to avoid the loss of manufacturing jobs in America. But we cannot achieve that through currency manipulation. Voters and unions are being fed a bunch of crap when they are told that protectionism has ever saved a job or that we will get the jobs back that we have lost or that new industries will pop up just because of it. When the big automakers complained to President Bush last November that they had a tough time selling their cars because of Japan’s unfair advantage from the “undervalued” Yen, I almost laughed and almost cried.

I evaluated the last five years from the time the USD index had a strong reading. Using the beginning of 2002 is also a good start date given that the Yen had its low back then. Additionally, I looked at the change in the currencies during two distinct periods of highs and lows - January 2002 to January 2005 to Today. Just pull up the charts on the USD index and the Japanese Yen/$ exchange rate and you’ll see why I picked those two dates.

From January 2002, until today, the Yen actually appreciated 8.5% relative to the dollar while the USD index declined 30%. From January 2002 until January 2005, the Yen appreciated 22% and it was only from the beginning of 2005 until today that the Yen has depreciated (17%) relative to the dollar. Meanwhile the USD index declined 31% from January 2002 to January 2005. Today’s USD index value is almost exactly where it was at the beginning of 2005.

So what? Well, just consider the automotive industry. How many tens of thousands of manufacturing jobs did Ford, Chrysler and GM cut since the beginning of 2002? How much of the job loss occured during the Yen’s period of appreciation in 2002, 2003 and 2004. And then how much since then? Furthermore, look at the unit sales figures for various manufacturers during those periods? What you will see is that US automotive manufacturers have had declining unit sales and job loss regardless of the change in the Yen.

If it is critical for Ford, GM and the new Chrysler to have the Yen appreciate relative to the dollar, why did they not do well during 2002, 2003 and 2004? If they could not succeed while the USD declined 30% since January 2002, how much lower does it need to go for them to achieve their results?

Despite years of Treasury secretaries Snow and Paulson telling everyone the administration has a strong dollar policy, we have a weak dollar. I keep wondering when one of our trading partners is going to tell us that our dollar is too weak. If we can whine about the Yen or Yuan, is it not fair for others to bitch about us?

I’ll end this post with one question..if the Yen appreciates relative to the dollar, will GM, Chrysler and Ford suspend all the tens of thousands of job cuts they are planning? I doubt it.

I have proposed several ideas for investors to consider inflation. Here and Here. They are not scientific but that’s okay and preferable in my opinion. The “scientific” inflation data coming out of government data is not consistent with my life, and I doubt they reflect the realities facing American consumers.  Regardless, investors will continue to rely on the numbers presented by the government - that is after all, how they have been trained.  But from time-to-time, it would be healthy to think past the numbers we are handed.  When it comes to macroeconomic commentary, I put Barry Ritholtz at the top.  So please read this post of his and give it some thought.

Hang on for the ranting stream of unconsciousness…

• This market is way too dependent upon economic releases and the daily fascination with their effects on FOMC rate decisions.
• The bulls who called for an end to rate hikes prior to last year were wrong for a long time.
• The bulls who have been forecasting a Fed rate cut have been wrong since last August.
• The odds on rate cuts as expressed by watching the Fed futures trading have been wrong about as many times as they have been right…before they became wrong again.
• The economic data released by the government is all over the map.
• Investors react to high inflation one week and react to low inflation data the next…meanwhile prices themselves have neither gone up or down measurably over the few days between each market reaction.
• The variability from month-to-month in government economic data is only topped by the revisions that follow.
• The formulas used by the government rely upon variables and weightings that are highly fungible at best and wrong at the worst.
• The weaknesses in all this data allow economists and investors to parse or spin or discredit at their whim.

Despite all these absurdities, the market continues its fascination with forecasts that are wrong and data that is wrong.  However, this behavior is largely irrelevant for now.  The market is higher and that is all that seems to matter.  Many days, this data and the reactions to it are given as reasons for the move despite the fact that most intelligent investors have to know that the data they are relying on today, will likely be wrong tomorrow.  In an investing world that preaches its reliance on fundamentals and long term decisionmaking, this is a big farce.  I am not saying we should ignore the data that comes out every day, but it would be better for the long term if we didn’t overreact today and overreact tomorrow.

Two weeks ago, I said I would update my view if I became bearish on Gold. That happened last week after it failed the $690 resistance levels I have been worrying about. Now, I don’t expect support until $640 per ounce and with the CPI data coming in with muted numbers, I do not see an emerging catalyst to hold back a slide. The long-standing inverse relationship between the US Dollar and Gold is definitely still a factor, but I am watching it closely. As I wrote in the May Market Forces post, I am looking for the USD index to trend higher this month, and that is consistent with a bearish move in Gold. However, the global macro and trade data is always threatening to disrupt the dollar’s advance. Lastly, the growing protectionism of the Dems as witnessed by the May 9th version of a currency witch hunt might shake up the whole mess. Until further notice, I am a Golden Bear.

“Van, Bus, Others” that’s the account name where you’ll find Daimler’s investment in Chrysler when their first standalone financials come out. Some bitter Chrysler people will not hesitate to tell you that’s where billions in Chrysler capital was re-allocated by Daimler during its ownership. So maybe the balance sheet account name is very appropriate indeed. I know Dr. Z and Daimler management was anxious to dump Chrysler and the same can be said for many Germans who always felt their beloved brand was cheapened by the ugly American division. Certainly, investors in DCX have voted their approval…just look at the massive market cap bump that the company has received since announcing its intention to get rid of Chrysler. As I was reading through Daimler’s Press Release and some of the terms of this deal, I kept hearing the comments by the parties involved who said this was the best deal they could get. If netting out $700 million and offloading the $19 billion in health and pension obligations was the best they could get, how bad were the deals from Magna, Kerkorian and others? I know DCX shareholders are still basking in the glow, but I wouldn’t be surprised to see some criticism. Is it too late to listen to better offers?