Today’s CPI number is entirely unbelievable. However, it is a trading opportunity. The market is dominated by traders and not investors. So stop asking why this bogus inflation number is being believed by the market or suggesting that the market’s rally in response somehow validates or certifies the number as being appropriately bullish. It doesn’t matter whether the number is right or whether it fairly represents the consumer’s experience with rising prices. Traders do not need to believe in the long term realities - only the short term opportunities. If the CPI data would have not been manipulated or somehow had shown up as much hotter than expected, it would have been a trading opportunity for the downside. Regardless of how the CPI data is reported or used by the market, it does not change the real inflation rate being experienced by consumers. So for today, traders are exploiting the number….it doesn’t matter whether they believe the unbelievable number…it only matters that they believe they can trade the unbelievable number and make money on it. Can you imagine that today’s data would come out and traders would say - “We don’t believe the CPI and even though we could use it to make money, we are just going to skip the opportunity.”

Since mid-March and the Bear Stearns bailout, the market has been remarkably strong…until now. There was a lot of damage done last week. Unless there is some positive catalyst or an unexpected show of force by bulls looking to put on new positions and defend the rally, I am less optimistic than I have been for the past few months. Good luck this week.

First - the “Away” part. Portfolio management is an all-consuming and ever-present process for me. I rarely take any time away during the trading day and if it happens, it’s usually not two days in a row. Other than skiing or beaching, there isn’t much that I prefer doing more than actively participating in the securities markets. However - “All work and no play makes Mike a very dull boy.” I need to get my life in better balance and I am “working” on that.

On vacation, you meet people and inevitably, as part of the small talk, you are asked what you do for a living. I hesitate to answer that question for several reasons. First, I am on vacation to be on vacation. Secondly, I do not give individual investment advice. The moment someone hears I am in this business, the requests for stock picks begin. Then I have to find a way to politely tell them I don’t give stock picks. It’s all a bit awkward and usually puts people off to the point where they go away. I am not much fun to have around. I really should come up with an alternate and dramatic and fun career to lie about in certain circumstances so that it’s a bit more enjoyable. I am “working” on that.

Last week, I was asked what I thought of the economy and the markets in general. Good questions, but really…. do you think my sunny disposition about the economy and our screwed up markets are going to make people happy while they are relaxing on a beach or at the bar? I know it’s not making me happy. So I have another choice - maybe I should just lie and tell them what they want to hear. Of course I cannot do that. I usually just say “it’s bad” and try to change the subject to the weather or sports or some other useless topic. I can talk about most things but oddly enough, unless I am here or in an appropriate environment, I don’t like to talk about what I do.

Being away from it all last week was much needed and it’s been tough to get back into my normal rhythm and routine. Other than the research I had to do to get the signals done this week, I haven’t been motivated to analyze what I missed. Consequently, I have very little to say.

When I hit the beach, I thought the market was ridiculously bullish. I kept thinking “Up Up and Away!?!” When I got back, despite the GE miss and poor trading action, I wasn’t seeing an end to the rally that was being mentioned by some commentators. In fact, this week’s signal changes were not dramatic at all. I only gave 111 new DOWN signals and while that was much more than the 19 new UPs, it’s really not remarkable. So I keep wondering “Up Up and Away!?!” That is yet to be determined.

I won’t be traveling much for a month so I won’t suffer from being out of touch and away. Sooner or later, I’ll feel like writing more often. Until then, I’ll be working on other pursuits.

In the last two weeks, I have found it much easier to do the fundamental and technical analysis that determine the signals on all the thousands of stocks I cover.  I am not sure how long it will last or whether it means anything for the market’s direction, but I am enjoying it compared to how ridiculously difficult it has been since November.  However, now is no time to take a breather and relax.  Stay on guard at all times because not much has changed regardless of all the efforts by the government.

Two weeks ago, I gave 628 new DOWN signals and only 21 new UPs. That was the most extreme negative or positive move I have done in the past 5 years of HEDGEfolios by about a factor of 2. It was a very tough one because 449 of the new DOWNs were signals that I was wrong about. Typically, 68% of signals at HEDGEfolios are closed out as winners so it wasn’t so easy to have a week where I changed course with 71% being wrong.

Many investors have big difficulties admitting when they are wrong. I do too. What makes it easier for me is being objective about the prospects for being less wrong going forward. Capitulations occur out of desperation. Exiting a position at a loss is not the same as capitulation if you are focusing on what will happen to the stock next, not what happened to the stock in the past to cause the desperation.

On the night I made these decisions, I hinted at what I had seen when I wrote about When Bottoms Drop Out and I voted Bearish at the Ticker Sense poll. I think this was the only time I ever changed my vote on the poll before publishing the signals and timing indicator at HEDGEfolios.  I thought it was extreme enough to violate my policy and earlier that night, I was a bit more ominous when I wrote this:

During the 5 or so years I have been doing HEDGEfolios, there have been three times I have thought the market was at risk for an imminent and serious decline. August 16th, 2007…January 21, 2008…and today. The previous two times, the Fed showed up with surprise cuts the next day.

The dramatic reversal I saw in the charts a few weeks ago had to do with my belief that many stocks trading near their individual support levels had made decisive moves lower. I call that a bottom dropping out. That eventually played out in the days that followed as we hit new lows. I was off by a week, but Bernanke did eventually show up with a new bailout tool.

This week, I gave more new DOWNs (158) vs. new UPs (103).  Then the TSLF spiked us higher and yet, nothing about Tuesday’s big rally has changed my mind.

Since August, there have been numerous times when Bernanke was told he didn’t know what he was doing. Then he would do something never done before and immediately he would be lauded for his precise, tactical, and creative monetary policy. Surprise Discount Rate cuts and Surprise Fed Funds cuts are not really creative or new. But when you throw in the TAF and the TSLF and then currency swaps and the coordination with other Central banks and the repos and all the other things they’ve been experimenting with, you’d certainly have to agree he is creative. As for effective, like his boss says, I think we’ll have to leave that up to historians to decide.

Yesterday’s TSLF announcement was once again timed perfectly during the premarket futures action to provide massive effect. Somehow I just cannot believe the 8:30 am release was just a coincidence when you consider the same time was used for all his big ploys to screw short sellers and create a dramatic show of how he can spike stock markets for short periods of time. So to the extent he gets respect for being a great defender of the stock market, I think that is undeniable.

I am still waiting for a rally to begin without Ben. Since August, it’s been all about the government creating trading opportunities, not investors creating investing opportunities. Yesterday was no exception. Each selloff is coming from real selling, each rally is coming from the Fed, rumors about bailouts like Ambac, and short covering rallies. A lot is being made about the constant selling on strength but more important to me is the fact that the bulls are not initiating much other than real selling whenever they get the chance.

Yesterday was very creative and I won’t even get into the size or the coordination or the timing or the crap collateral or the 28-day duration. I’ll just concede that it was creative. And it was effective for spiking the stock market as a trading opportunity. I doubt it will solve the problems in the mortgage backed area. It made it less bad, but I don’t think it was a solution to make it better. As I have repeatedly written, I have faith in markets to deal with these situations - not governments. The market reaction was almost as if the muni market was fixed. Or the Commercial Paper market was fixed. Or the consumer was fixed. Or the dollar was fixed. Or inflation disappeared.  Or the housing resets all disappeared. Or the housing market is now appreciating……It was creative, but as for evidence that anything was really accomplished yesterday, I think historians will tell us a few decades from now.

I’ve been asked by a German trader whether the haircuts will generate a mark-to-market writedown situation for those securities being offered as collateral for the TSLF. I have asked the authority on the subject and am waiting for a response.

Today’s “loss of Jobs Report” convinced quite a few people that the economy is either already in or soon to be in a recession. It’s amazing that with all the other data that has been around for months, suddenly this one report is all that it took to bring supposedly smart people over to the dark side. Maybe it was the proverbial straw that broke the camel’s back but I find this a little absurd and useless. In the past, I ripped on the market moving on the Jobs Report whether it was up, down or flat and whether or not the economists guesstimates were off by tens of thousands compared to the government’s initial guess that will be revised about 3 more times. So forgive me if I am not going to jump on the recession bandwagon just because this report was so crappy. Besides, I am not too excited about being potentially associated with some in the crowd that were so clueless until caving in today.

I felt the same way when many economists, politicians, “journalists” et al were denying that the economy was struggling. How many times did I have to hear the President and his crew say the “underlying economy is sound” before I realized it really hadn’t made a single impact on how I did my work with HEDGEfolios? Exactly Zero. I never said to myself, “Hey we are not in a recession so let’s go buy every stock.” And I won’t be doing the reverse. There are always stocks to buy and always stocks to sell every day whether we are in boom or bust. I know other investors conduct portfolio management based upon giant macro themes and seek out individual stocks that are supposedly recession proof. I hope it works for them and I am sure that they will probably be spending this weekend figuring out how to adjust their folios. As I’ve said before, I don’t go defensive. Hearing a consensus of economists announcing that this one Jobs Report seals the deal certainly doesn’t change my opinion about how to manage stocks. I have no idea how knowing we are in or not in a Recession will tell me exactly which stocks I need to buy or sell. Today’s action was not helped by the reality that our economy is struggling but there were many other factors that caused it to slide. Yesterday there were other reasons. Next week there will be other reasons. Those are the things I am focusing on.

I am declaring this my Recession Secession. I am simply not going to give any credibility to the idea that yesterday we were maybe not in a recession and today we probably are. So I am seceding from the Recession camp and leaving it to people who really care.

Over the past 6 weeks, there’s been a lot of attempts at forming bottoms in the stocks I cover at HEDGEfolios. I’ve given about 1000 new UP signals during that time and until the middle of last week, I was starting to think that the market had a good chance for a bear market rally to continue for a little while. That still may happen but my optimism is no longer there.

One of the dangers of stocks trading near an apparent bottom occurs when the bottoms drop out. In this volatile market, there has been very little convincing volume to solidify whatever bottoming appeared to be happening. The moment we face any pressure to the downside and the recent buyers are tested. If they take profits, the bottoms drop out. If they just hold and fail to provide new buying demand, the bottoms drop out.

Last week’s action poked a lot of holes in very weak bottoms. There was no capitulation on January 22nd when the Super Stallion dropped rates.  It’s not going to take a lot of selling to move prices dramatically lower.  On the other hand, it will take a lot of buying to hold 1270.  If a flood of buying does not happen very soon, you can kiss your bottom goodbye.

During the 5 or so years I have been doing HEDGEfolios, there have been three times I have thought the market was at risk for an imminent and serious decline. August 16th, 2007…January 21, 2008…and today. The previous two times, the Fed showed up with surprise cuts the next day.

Over the past few weeks of rallying, quite a few commentators have discussed the likelihood that there would be a retest of the recent lows at 1275 - 1300 on the S&P 500. While I agree with that, I don’t agree with the add-on assumption. Many of these “technicians” go on to imply that the retest will be successful. That may happen but we have no evidence a positive result is a certainty and I prefer to let the trading patterns decide when they occur.

I am confident that there will be an attempt to program some trades and create a “double bottom” retest. This kind of “manufactured technical analysis” has been the subject of some of my recent posts so I’ll just provide a link and save the repeat about how much I disrespect this crap. Regardless, it’s too tempting for certain market participants to avoid making their own trading opportunities so I just wait for it to happen and evaluate the merits of whatever shows up.