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Shark jumping at the top of this US market’s downward “Trend”, and bedlam at the bottom. That’s a borrowed “Happy Days” line that I have been using, and boy did we see some bull sharks bloodying the short selling waters yesterday. That was the biggest rally we’ve seen since April. Volume was strong; breadth was impressive. The S&P 500 closed at 1284, right back at the level where I moved to 85% cash.

If you handed me Bernanke’s transcript before the FOMC release, I would have moved to 95% cash. Obviously that would have been a mistake for an hour or two of post communiqué trading. Thankfully, nobody did! Despite his opting to pander to the political winds, and do nothing but keep the easy money card in play, the US Dollar held its august to date gains, as did US Treasury yields. Commodities markets didn’t stop going down either – the CRB Commodities Index closed down another -74 basis points on the day at 398. It was a very impressive day for the bulls.

With small caps racing higher, and US Consumer Discretionary stocks posting a +6% day, we have to respect the effort out there from those who think they’ve called the US market bottom. My models spit out new ranges after every 90 minutes of market trading. At yesterday’s close, I moved to an S&P downside target of 1231, and an upside one of 1292. If you are going to play this game fully invested, I think you should trade this range, aggressively.

In terms of consensus expectations, the facts have changed materially in the last 3 weeks on two fronts: Inflation and Growth. Commodities driven inflation has deflated to the tune of -15.7% from its early July high (CRB Index), while worldwide growth expectations have deteriorated materially. In the US, the most relevant flashing amber lights on my screens are the emerging bankruptcy and unemployment cycles. Globally, Asian growth stats continue to deteriorate. Japan’s Finance Minister, Bunmei Ibuki, held a press conference overnight walking through his newly found economic “forecast” for guess what? “Stagflation”. Now we have the top 2 economies in the world stagflating. That’s not good.

Trading this global tape has not been as easy as the US Federal Reserve’s monetary policy. From here, I think you’ll do just fine fading the high end of my trading range and getting longer at the low end. However, the best positioning will remain the concentrated in cash one.

The US government and banking system alike has not given me any reason to believe them, or that they have a proactive process that will allow them to protect against downside tail risk. This is most obvious in Bernanke’s tag line forecast that the Fed is "expecting inflation to moderate.” He has used this line in the FOMC statement since August 2006!

As the facts change, I do. While the aforementioned facts related to inflation and growth have changed, this alarming “Trend” of a politicized US Federal Reserve has not. Like global stock market investing, Fed watching has become a mania. Manias generally don’t end well. As this one’s confusion continues to manifest itself via volatile trading waters, I’m happy to be on the shores, watching the sharks jump.

Per our friends at Wikipedia, Shark Jumping “is an allusion to a scene in a 1977 episode of the TV series Happy Days when the popular character Arthur "Fonzie" Fonzarelli literally jumps over a shark while water skiing. The scene was considered so preposterous that many believed it to be an attempt at reviving the declining ratings of the flagging show.”

Best of luck out there today,