I usually love Flag Waving holidays like Memorial Day, all full of patriotism and hope. They also usually lead to near-term stock market rallies and this one may be no different.

But there is something coming and its big and ugly.

We’ve been living with the financial facts, as they are, and the legacy of the worldwide “Credit Crisis”. But most everyone is beginning to realize, somewhat belatedly, that we cannot grow out of these problems. Money printing has been dandy but it is purely temporary and adds to the problems eventually.

As you know from my postings, the market has been under classic Distribution since April 1st and most heavily since April 17. There were double tops and negative divergences everywhere. Yet the major indices held firm. Even now, after a 100 point SPX drop, the indices are up since late December. Do they deserve to be?

Here is a news flash: Markets are broken. Real liquidity is non-existent. Banks may show a profit but they are a mess. A deflationary vortex could be right around the corner. This is what the FED has been fighting all along. They say the are inflation fighters but now they are combating deflation by using the artificial inflation of financial assets to mask reality. And its been going on for almost four years now.

Maybe I’m just another End of Days jerk who will be prove to be an idiot by the Bernanke Bid after he creates another trillion or two dollars to boost asset prices. But it sure feels like the markets are going to shed double digit percent, maybe fast and maybe soon.

If you are an institutional or professional investor, you know how to hedge risk. If you are an individual investor, you don’t have to ride it out. You can actually convert your 401k into cash at any time. Maybe you should consider something along those lines.

Sure, markets are very oversold. But that is when the downside is most dangerous.

Reality only happens for a split second. The rest of the time is made up of people’s perceptions. Just look at the markets.

There has certainly been significant corrective activity in financial markets since April 1 and more importantly since April 17. With all the myriad negative factors underway, it is no surprise. But why isn’t it worse?

Everyone knows all the problems already. And the perception is that no matter what the problem, liquidity will provide the answer. See? We all know this!

But the reality is that even with trillions in free money, markets are more illiquid than at almost any time in modern history. With daily volume running half of what it was in 2007, the lights are on but nobody is home. God forbid there would be real selling of size. We got a tiny taste of that last week, down 5%.

The magic halfway point of the “Europe is Saved Rally” has held as important intermediate term support. But it will be tested again soon. Maybe not next week because of the Flag Waving Memorial Day Holiday, but shortly after.

This year is just like last year. And the year before. And being an election year won’t help. Remember what happened in 2008?

I’ve purposely neglected to discuss the JP Morgan trading loss because we can only speculate as to their true position. But the two billion dollar loss could quickly spiral to many times that.

Supposedly, the position will go further against them if Europe sinks further into the morass. I’ve had a thought, and I’m sure I’m not the first.

Remember how bank stocks were attacked, one by one, in 2008? Remember how all the CEO’s all complained about how “short sellers” were damaging their franchises?  Remember how banks failed in the marketplace, one by one?

Are there other non-disclosed positions that could turn large? Are they “laid bare”? Would it be possible to kill JPM at this time? I think the answer might be “yes”.

Of course they will have an unlimited credit line from Uncle Ben, but a tightly focused, highly leveraged “attack” could wreak havoc on JPM and perhaps cast a much wider net. Sure, they’ve lost significant market cap. But perhaps it is only the tip of the iceberg, just like in 2008.

Well, well, well. So we dribbed and drabbed to get back to the halfway mark of the “Europe is Saved” rally. It took six weeks to give back about 100 SPX points. Then we lost another 25 points in a day and a half.

There is plenty of blame for the action and its the same shit that I’ve been ranting about for weeks, months, years. I certainly don’t need to list them, outline style. And after three consecutive years, there are no more winks and nods. Everyone finally admits the true state of the economy and how truly fucked the capital markets are. The latest rally has been fun, like the previous free money inspired moves, but time and price are running out.

I believe in “The System” and that that it will endure long after we’re gone. But it needs a hard reboot and that will certainly be painful. Maybe the G-8 will pony up another trillion or three. Perhaps we can invent another product or sector that can distract investors and traders. Or maybe not.

Bearish. That I hate the Construct of markets in today’s day and age. That is true.

But my target for the $SPX was the 1320 area, which has given back half of the “Euro Is Saved” rally. That meets my intermediate-term target.

Couple that with FaceBook and Option Expiration tomorrow and the extremes that are building with all the negatives out there (you know them all, well). It is time for a selective stabilization and bounce.

Don’t get me wrong, we remain “elevated” and the Central Bankers will pump more freshly digitized money into the system, but this 50% retracement and the Calendar (Memorial Day) spells a pause is in the offing. Enjoy!

Yeah, so. Isn’t it great to be an individual investor, reading the newspaper and watching TV for your information? You probably really believed that the economy was “percolating”, that housing has “bottomed” and that the world is a “better place”.

It’s all propaganda and bullshit. I mean, it’s all going to zero, right? Nope. But if you’ve bought the “Economy is Great and Europe is Saved” rally since last year, you are probably a bit uncomfortable. After all, you bought assets that were “inflated” by the Central Bankers of the world.

But we all know that story. What’s amazing is that we’ve come to accept, even relish it.  

Listen, the market is drier and seemingly less liquid than at any time in the past twenty five years. There have been trillions in liquidity pumped but if there become an impetus to sell, there will be nobody home. And the volume (which no longer matters) is half of what it was in 2007.

Sure, there are extreme viewpoints of sentiment but there is no overly bullishness or bearishness reflected in the market action. We are in an intermediate term uptrend and a near term downtrend. And aside from a few huge moves in individual names, the market has settled into seemingly watching paint dry. Except for the dismemberment of the QE trade in materials. Does any of that mean anything to you?

I’ve targeted the SPX 1310-1320 area as first support last month and we are almost there. You don’t think this bounce is putting in a near-term bottom, do you?