The rally from the August lows has been nothing short of amazing. I did not expect it to go this far. I am still of the belief that this is a bear market rally . Nothing has changed except my P&L. Everyone needs to step back and take their hands off the wheel for a moment and ask yourself this question: What kind of rally would cause maximum pain and wealth destruction if I am right and we are in the beginning stages of a bear market? Yesterday some of the most stalwart bears approached me and said they were about to cover. I suspect many did. I heard the same anecdotes from others. We basically came within a stones throw of the AT closing highs. The logical assumption is that we might as well go to new highs. So we have the folks hopping on board to punch this through and the bears covering for fear of the new ATH thus proving them wrong. So if we were to top yesterday it was a fitting day and would cause the most amount of pain. The market just took the bears money. Now its coming for the Bulls. If I am right then the next leg down will scare even me. I am close to yelling “Sell 30 April at 142”.
The 12 month LIBOR rate (Chart 1) is not buying this rally as well as the TED Spread (Chart 2). The TED Spread rose 4 BP this week This rate is the Interbank lending rate. Apparently the banks don’t trust each other. Its a measurement of financial stress in the system. If this rally was real it should not be accelerating higher. I suspect CDS and HY will begin to follow soon and then finally equities.
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