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The second time is a charm here - if you are net long the US market that is. This is our second test of the high end of my S&P 500 “Trade” range in the last two weeks. The first of course was the 88 point, +7.3%, S&P 500 rally from the oversold 1201 intraday print on July 14th – the latest was a 50 point, +4.1%, move in the last 48 hours. Positive short term “Trade” momentum in the US Dollar, US small caps, and anything with high short interest has appreciably improved.

Fortunately, I’ve been running net long. That said, I have been nervous about being net long the whole way up! I am not going to stick around and wait for a third rally. I will not regret saying that I missed it, if it occurs. In the last 2 weeks I have moved to 85% cash. I think patience in the next 2 weeks will pay. There is going to be too much pin action into and out of tomorrow’s employment report for my liking. Sometimes doing nothing is the best decision I can make.

Could the S&P breakout for a shark bite squeeze if the US employment report is more bullish than I am expecting tomorrow? Definitely. Could the US financial system crash on any given trading day this summer? Definitely. For every short term bullish fact on my sheet, there’s an equally bearish intermediate one.

The question from here is one of duration. I’m more comfortable taking a step back so that I can see the next week of facts. I want to let this psychological fire breathe how it may. I’m having a great year so far, and the last thing I am going to do is put my hard earned capital at risk betting on an employment number or Ben Bernanke. What I think he should do at next week’s FOMC meeting, and what the political winds could force him to do, are two very different things.

I wrote a few intraday notes in the portal yesterday that speak to the bullish “Trade” case from here. Volatility (measured by the VIX) and Oil under 21.52 and $127.46 respectively are bullish market factors driven by a US Dollar Index holding its head above the 72.69 line. Bernanke could support these emerging bullish macro factors if he raises interest rates, and breaks inflation’s back. He could also blow it up if he panders to the political winds and devalues the American currency again at game time.

The Fed extended its emergency lending facilities yesterday to January! In plain English, that means that “Helicopter Ben” will drop cheap money onto Wall Street for the foreseeable future. This is a cute, but more appropriate, nickname than any other for Bernanke until he stands up, provides some leadership for the US Dollar, and moves away from Greenspan’s easy money air show.

Respect in any game is earned, not appointed. For now, team Bernanke/Paulson is running out of time on the clock and, for now, I am not ready to bet on their coming out of this looking like they won mine.

Best of luck out there today,
KM