BIG TIME ALERT:

Master of the Obvious is calling an audible:

The market’s stubborn intransigence to the upside could easily be reflected on the downside. In English, the Egypt situation could have oil up 10% today and the markets down 4%.

This is one of those exogenous ‘X’ factors that we must always pay attention to. Watch how the market receives the Mubarek comments.

You have been alerted…

Now that the frenzied analysis of the President’s SOTU speech is over, here is my 02. Notice that the first comments were not on the state of the union. Nor was it on the state of the economy. The focus was on the stock market with the comment that it has come “roaring back”. That is what four trillion hard dollars have bought.

The Chairman of the Federal Reserve talks about economic statistics and such. But his proudest moment was the comment about how the Russell 2000 small-cap index is way up.

It is past obvious to market participants that at the very highest levels of our government, the unstated policy is to get the stock market up. It is how companies measure their success. It is the basis for our sentiment and outlook on a day to day basis. And with the market all the way back to where they were before the credit crisis, the government–in cahoots with the media–can say that the crisis is over and everything is back to normal. The public doesn’t want to know how we got here, but that we are here. Mission Accomplished!

But the best part of the stock markets high level is that analysts and strategists can say that the economy is roaring back too. Since we’ve been told that the stock market is a “discounting mechanism”, why else would it be so relentless and seemingly powerful? This perception was prevalent during the run up to the end of the year and the holiday shopping season. But less than one month into the new year, the numbers are saying something else entirely. Production and consumption are weakening after the holiday bounce. The only recovery is a perceived one based solely on market gains.  Let’s look at those gains.

The market leadership for almost two years has been commodity, energy and material-oriented. Their relentless climb came on the back of a weak dollar and a flight to hard assets. Throw in a lot of Chinese hoarding and it makes for a powerful advance. But the price of commodities has advanced to the point where demand is now dropping because of price. Thanks, financial speculators!

The other area of the market that has been leadership is “new technology”. The mobile revolution has driven many stocks in just a few months and has been the latest market leadership. If speculation is encouraged, then volatile stocks certainly become very popular. Throw in the “new daytrader” who chases all manner of micro-caps, especially of the Chinese variety, and you have what many perceive to be a “healthy market”. But it is the farthest thing from it. The trendlines might be perfectly intact with technically record setting advances and bullishness, but I can now say, without reservation, that the market is totally and completely controlled. More today than at any time in the two year recovery.

I liken today’s market to the fable “The Emperors New Clothes”. In the story the vain Emperor will do anyting to look good, even to the point of being totally snowed, lied to and taken advantage of. Nobody is willing to state the obvious for fear of losing what they have, until an innocent child pipes up that “he’s wearing no clothes!” At that moment the jig was up. Someone will eventually reveal the truth and the markets and the government will suffer the consequences. It might be today at SPX 1300 or higher. 

Our wonderful market, the one that promises good times ahead and doesn’t even so much as dip, is naked, perpetuated by a flawed economic policy that will eventually and surely lead to another major economic and market disaster. And I’m not Zero-Hedging you. Remember, I was the guy pounding the table buying the most beaten down names just a few months ago, when you now free-money bulls were busy waiting for the inevitable crash, from SPX 1050 and VXX’ing yourselves into oblivion. In the meantime, we are at SPX 1300, about 25% higher than where you expected a crash.

The public will now start to get some confidence and buy thanks to media histrionics. Have you heard about the “Smart Money”? I guarantee they will be selling. So, don’t get cocky and cherish the ultimate arbiter of our nations self-worth, and maybe yours too, because it is a devilish beast designed to bury you–even with almost unlimited free money.

And in just one day, the divergences in the market are gone.

Commodities are rocketing off their lows of yesterday morning. Small caps are leading all markets higher. The lagging transports are not far behind. And the recently leading Dow is now the laggard. Defensive issues are down and speculative stocks are up big.

Aside from the margin call in commodities, why did the broad market recently pause? Did anyone believe that the FED would get conservative? Were bets hedged that the untold billions in free money would dry up?

I’ve just had a revelation as to why there is such a dire need to buy already inflated and risky assets. Because the money to buy them is free! Nothing is risky when there is no cost. It’s just like buying a million dollar house with no money down. You’ll gladly pay the mortgage while it is appreciating. But if the price drops, no worries because there is no real loss. Only the perceived loss of the unrealized gains.

In the last hour on Tuesday and through today the markets have renewed their primary trends established and cemented during the rally since September. The FED has again made the promise of free money to keep inflating because there is no “inflation” as they see it. Especially versus the deflation that continues in real estate assets. But nobody wants to talk about that any more.

Even the most perma-bearish stock trader I know has resigned himself to ZIRP, POMO and QE forever, without a bearish trade possible. Opinion is virtually unanimous. I know I’ve said this before, in November and we had a pause. But it is even more cemented after today.

I know everyone is sure that we continue our levitation act, but the vast majority of stocks have already entered a new trading range. Many dropped over the last few sessions and tested their most recent primary breakouts. Next will be a test of their recent highs.

They say how goes January goes the year. So far the stats are impressive with just four trading days to go. Just like last year but without the promise of QEIII.

Very few people want to believe that the market is rolling over. They “just know” that Uncle Ben has their back.

Are folks buying because of earnings? Are they buying a great economy? A resolution to toxic real estate assets? Nope. Why else would anyone in their right mind bid for anything outside of the defensive area of the market? And the defensive areas are outperforming. Just like most recently when the lagging mega-caps led the way. You know what they say about when the laggards lead. 

Shorting has been a losers game but a few brave and long suffering souls are due. After the FED tomorrow, we could get a pop through Dow 12k. That will create the first trading-oriented, oscillator-derived negative divergence since November. Though giving back yesterdays gains–even slowly–is not a happy outcome for the dippy buyers.

But never fear. Just watch the TICK and witness the beauty of the spikey buy programs that run hard when any important levels are challenged.  Timing is interesting, huh?

We have witnessed an interesting phenomenon over the past few weeks. The Dollar, as measured by the DXY, is trending lower and commodities are too. That is a vastly different inter-market relationship that we’ve seen in the past two years.

The media and trend-following strategists (the worst kind) have been busy telling you that commodity prices are up because of demand or because of the expectation of a stronger economy. We all know that is utter bullshit. Some even tell the truth; that prices are up because of the Fed pumping money through QE and ZIRP. Certainly true.

Most commodities are now getting crushed for the first time since the crash. Is the economy weakening? Is the Fed finished pumping? No and no.

The powers that be realized how devastating higher commodity prices are to the economy. But instead of ceasing and desisting from the manipulative unlimited and forever monetary rescue, they decided to manipulate yet another market by raising margin requirements and imposing position limits for commodities.

I’m the first to applaud these new rules–which should have been imposed in the first place. But it just shows that the centrally planned and controlled market continues to be centrally planned and controlled.

The funds that were heavily margined in commodities and have made buckets of money would rather sell than raise the cash for a margin call. Wouldn’t you? Clearly, it is orderly and happening over a period of days and weeks and without panic. And you can be sure that it won’t go on forever. Just until the new margin rules are met.

So, for example, Silver, which went from 20 to 30 from September to January, should give back about half the gain. If widespread margin has still not been met, then the pullback will test the primary breakout near 20. So as a trader, I would begin my position near 25.50 and be ready to buy down to 21. I know it is a wide range, but I am looking to get positioned for an intermediate-term cycle that will rise to test the highs again.

So let the margined sellers trip over themselves and be ready to pick up their pieces. If you don’t then someone else will.

Now that commodity margin requirements and position limits have been disseminated and selling contained, the sector is stabilizing. That has brought the post-expiration dip buyers out in force today.

Steve Job’s situation is becoming more clear yet the stocks sponsorship will not quit as Apple is up over $6 today. But the rest of the anointed leadership stocks are lagging. Mega cap tech old school tech is doing well. There is a bounce in the oversold speculative small cap sectors. Financials are holding their own.

The divergence between Nasdaq and the Primary markets is smoothing after just a few days of correction. If this continues, then the markets will have sorted out some of the most egregious excess while keeping the primary indices unaltered.

I’ve expected to get to Dow 12k as early as last Friday. We are getting very close today and the print seems to be a foregone conclusion. It will make for yet another headline to bring the masses back to equities. Will it work? Well, we’ve already seen equity inflows this year for the first time in what seems to be years. Remember, most of the investing public will only buy when it seems easy. After a 30% up move, maybe the bomb-shelter doors are opening? The sky seems blue, but remember, the background radiation stays high for a long time.

The market is clearly on a mission to get to 12k this week, perhaps even tomorrow. With the promise of economic recovery dancing in investors heads, expect even another marginal new high as we approach SPX 1300 again. But realize that the biggest laggards of the market are now the official leaders. You know what they say about that.

In the meantime, enjoy manic, merger, mutual fund Monday but be careful out there!