Up 25%. That is the difference between last year and this year. Other than the price level, markets are technically similar except for one glaring inconsistency; fundamentals are arguably 25% worse.  How can this be justified? Is it “great earnings” that grants us a better valuation level? Is it a fundamental turn in our economic situation? Neither. It is simply a couple trillion newly created digital dollars, leveraged and parked in risky but liquid assets that marks the difference between July 2010 and July 2011.

Just last month it appeared that the renewed weakening economy, joblessness, Euro banking problems, government spending, political rancor, etc. were coming home to roost after a spectacular bout of inflation was bought (QEII) to combat the deflation of bank assets. Instead we were treated to the “Magical Mystery Rally” (MMR) of 82 SPX points in just five days. In an equity market as thin and seemingly illiquid as ours, it didn’t take much to kill the doubters (again) and lift almost every stock in existence. It was one of the broadest and fastest rallies in history. But adjusting for the markets recent action since the Credit Crash, it was just another correlated ramp job like we have seen so many times in the last two years.

Since the MMR, we have given back about half of the rally and the SPX is “doing work” around the 1300 area and–even with all the noise and fury–that is where we stand today with one exception; gold and silver and going through the roof.

Precious metals are all the rage because of the ongoing Dollar printing, Euro and domestic bank issues, but even more because of the political gridlock in Washington with regard to the debt ceiling. And I thought Gridlock is supposed to be good for markets! Not this time. In 2008, oil was perceived to be the only safe haven until all the wheels came off the bus. Now it is gold and silver as the safe havens. Isn’t that the way it supposed to be? Indeed!

Now, here we are on the verge of either austerity or more unchecked and profligate spending, and neither is good for markets or currencies in a normally functioning marketplace. But obviously we are not witness to a normal marketplace. When the debt ceiling agreement is finally made, the markets will spike but they will quickly morph into a sell the news reaction. If it is not passed, then there will be no spike higher, just more angst. But both scenario’s should lead to the Swan Song of precious metals for the time being or until the next great political escapade.

Today, July 12, will go down as one of the most curious, interesting and greatest “market saves” of the year, maybe even the cycle.

It all started during the early morning hours when SPX Futures were trading down about 6 points. Then, mysteriously at 4am, they tanked, testing the 1295 area of major support. At that point, SnP’s were down about 25 points. With Europe going “off the rails”, there was some overnight fear. But just as mysteriously, futures began to rally making back almost the entire loss. By the time the markets opened, Futures were indicating down about 6 SPX points. And just as mysteriously, it dipped by no more than a few points once trading began.

Trading for the first few hours was heavy but the pre-market weakness quickly faded from memory. We see-sawed from up 20 to down 20 points in the Dow but by then, the “fix” was in as the Fed Minutes were to be released later in the day.

About a half hour before the Fed Minutes were released, gold began a very quick spike to near record highs. Silver reversed sharply to the upside and oil built onto its gains. It was then revealed in the Minutes that “further stimulus” would be appropriate given a continued weak economy. With that comment, the buy programs were run hot & heavy and the equity market spiked, sending the Dow up about 60 points.

During the course of the day, I tweeted a comment that “Flat is the new Up Every Day”. That was just before the “further stimulus is warranted” spike, and that comment is the unofficial leak of a future QEIII.

The entire day of trading has been most curious and before the release of the FED Minutes, I was thinking that today would go down as one of the greatest market “saves” of the year if we could close flat to higher. Rather I “believe” that someone or something worked very hard to frontrun the Fed Minutes and/or buy some market stabilization.

I don’t even want to get into the political machinations of the Debt Ceiling or the CDS blowout in Euro-land. I just want to highlight the most unusual trading today. And all the while we stayed within the important SPX 1320 area–which was the old downtrend line before the “Magical Mystery Rally” of two weeks ago. It is all becoming even more “fascinating”.

Remember this one thing: if the stock market goes down by more than just a bit, spending of all kinds will stop dead in its tracks. Can’t have that!

Have a close look at your favorite Nasdaq Index. Can you say “Double Top?” How about “Bear Market Rally?”

I dunno. The market is just so thin both up and down that it is difficult to place much credence on almost any move. But one thing is clear. Markets are in distribution after a historic two year rally. Make sure you believe NOTHING. Doubt EVERYTHING.

Very shortly the media will be done with Casey Anthony and will need a “feel good” story for the masses. That new story will be “The Greatest Market Rally of All Time”.  I will pretend to be a TV writer for a moment and the story will go something like this:

“Thanks to Obama’s savvy negotiations with Congress over the debt ceiling and the Federal Reserves stimulative actions, today’s job report proves more jobs are being created here in these great United States. Housing seems stable and the Europeans are actually raising interest rates, which suggests their economies are getting stronger. Those facts, combined with strong consumer spending numbers and further debt reductions spell good news. Over the pst two weeks, the Stock Market has moved more points in a shorter amount of time than at almost any other time in history. That usually means a better economy later this year and in 2012. So there is hope.”

Remember, for the media, Uppy Goody, Downy Baddy.

BTW–This year continues to mirror last year. After a May/June swoon in 2010, early July enjoyed a 60 point SPX rally. Here in 2011, we are now into our 80th point since the rally began nine trading days ago. If we continue to follow last years playbook, get ready for some volatility.

What can I say about oil. It has been $50 overvalued since GWB kissed Abdullah on the cheek. Now it may be even more overvalued. It is clearly subject to all kinds of market manipulations on the backs of speculators and the government alike. But apparently, how goes oil goes the rest of the market…

Have a close look at this daily chart of the SPX. Notice that we have been bouncing around the low-end of our trading range between 1250-1300 and just today did we vault above, however slightly. We can actually rally to the 1320 area and still maintain the downtrend that began in May.

These are simple technicals and this kind of analysis is a great help in your day-to-day positioning. But I have a new worry. Because the market has put on a spectacular end of quarter showing and all manner of financial assets have had a firm snapback, many market prognosticators will begin to say that the “economy” is getting better.

It is all a function of the day-to-day market action that dictates not just stock market sentiment but also overall business sentiment and perception. Most simply, companies value themselves on what their stock has done over the past several days. The same holds true for trading desks and investors of all kinds. And the Wall Street Complex dictates that prices spend more time rising that anything else–especially at the important end of the month or quarter.

So enjoy the party but until you can factually calculate TBTF bank’s shareholder equity, and know the true value of what is on their books, the “economy” as we know it will remain stuck. No political wrangling, no Central Bank stimulus, no investor confidence will bring back the “normal” economy until we wash out the bad debt.