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The persisting ‘tug of war’ . . . resolved temporarily to the upside as S&P 1115 was taken out several days ago. We acknowledged both in the intraday remarks Thursday and reiterated Friday that we were above resistance, allowing short-term dominance, for now, by the bulls; with a goal widely-shared probably of 1150; justifiable or not, as regards to putting fundamentals in perspective. While this basically meant the trading opportunities remained biased to the upside; it also meant the common perception of a market that would reverse the initial reaction to the jobless report, would not occur.

What it does not mean is that the overall employment condition is trending enough to justify or read as much into, as so many did on a Friday. For next week it definitely is not a signal to become complacent about market risk; or embrace melt-up optimism. I emphasize that lots of factors don’t add up to embracing even the employment report at the same time lots of the action related to the Nasdaq breakout; but it’s all Apple (a topic in one of our comments today; and while we find the iPad product lacking, at the same time we emphatically said it would sell well, to corporations and to students, not just commuters). And (because they don’t want to now) nobody is noticing that Sony, this year, is finally going to attempt an integrated assault of their own (a product that will melt cell phones, netbooks, laptops, and gaming machines) with the benchmark of Apple’s assorted products (which generally I embrace) as a clear backdrop target.

Daily action . . . will be covered in the weekend video, as well as our ideas about the sustainability of upward price behavior, and what levels are being targeted for now. In no way, again, does this warrant complacency; but it is very welcomed price action. It also doesn’t change a suspicion about next week’s outlined pattern action evolution.

A few key topics from the last several days presage the ‘technical corner’ video.

Universal expectations . . . of yet-another ‘disappointing’ number; this time the well-advertised Unemployment Report in the morning, made the rounds so widely with the idea of ‘weather’ or something else causing it to be weak; that we actually backed-off our intraday bearishness about how Thursday’s final hour might go (and Friday too). In fact, I uttered the idea to traders that if ‘everyone’ expects it to be mediocre, that it might just be inviting traders to run stock prices back up.

Certainly for the moment the bulls have sort of a ‘grinding’ momentum in overbought conditions on their side; and the very long-term protestations about debt entangling snares to the economy being just that (long-term; whether or not brought forward to a degree; but that’s an academic discussion, not a trading one) are thus not pertinent it might be said; until the market reverses anew, and then everyone will focus on that of course. Most of the bears have and remain transfixed on ‘sovereign debt’ issues as a sort of immediate impediment (we talk about it but have not, which our bullishness on the Dollar and caution on Gold have substantiated); whereas we see that as more of a macro consideration; though absolutely not irrelevant. Most of the bulls are focused on a strong and persisting economic recovery this year, and that too we disagree with (because you have yet to have the impact of defaults and delinquencies as still are in the wings this year). Even many retailers, rightly or wrongly, are likewise worried with regard to the 2^nd half, as visitors to tourist destinations still see a paucity of spending.

Macro action . . might correlate the market challenge with an earthquake zone map. There are theoretical and structural issues. Plenty of fissures around give concern at the same time that won’t tell you the hour or day that it widens into an awful chasm.

The structural solutions to our banking system won’t be repaired if we continue to get opposition to the Volcker Rule proposals (a variation on implementing Glass Steagal) even though of course the Financial and Bank stocks like that, because it suggests at minimum an effective lobbying effort to get Washington to back-off, if indeed there’s if one wants to believe it, no conspiracy between Wall Street and Washington with the manner in which ‘rescue’ funds have been deployed, or trading antics pursued of late with respect to everything from Agency securities to not unwinding or penalizing bank reserves for failing to address the derivatives issues remotely in an adequate way.

Without reform to the deficit-side, there is a looming fiscal and pension crisis ahead if anything at all makes sense. Just because they’ve labored to hold the market intact is not a reason to believe that these major challenges have been circumvented. In one sense a new ‘bubble’ has been built by creating excess valuations during a wartime. It is for that reason that we believe, temporary respites notwithstanding as noted, that risks are increasing not decreasing, while the market hangs tough … temporarily.

As we view the VIX (volatility index) as troughing in the general area roughly for now; it seems that we must be prepared for this to shift to higher levels almost with little or no warning. That’s not to insist that Friday be such a day (probably higher not lower, as so many now concur about the data), but that one be on alert for it. For ourselves we maintained a defensive policy; but sold not chased Gold; stayed optimistic on it; should be noted the Dollar and Oil; did not short a single share of common stock, and where we are active it’s been on the long side in Oils and some tech. Even noting the possible cessation of weakness in some perennially weak domestic refiners (moved to the upside nicely since too). Other than these factors; looking to get long volatility on rallies in the market (dips in the VIX) and scalping moves in the S&P (mostly tries, and mostly successful; fading morning spikes or buying dips). Beware complacency.

Free market populism . . . may be a political slogan at this point (or one forming just ahead of the next Election); while in reality it’s the ‘financial system’s liabilities’ that in my opinion should be given more focus at the moment. While we concurred that we’d not see a big currency debasing ‘yet’ (that was the core of our Dollar bullishness late last year, that correctly reversed our preceding bearishness; and it’s because there’s such little restraint on spending, but such a mediocre recovery at best, that we stated inflation was not yet a concern, with the opposite…Deflation… still an ongoing issue).

Back to the financial liabilities; there is a continuing conspiracy (call it brilliant plans if you prefer) between Washington and Wall St. to obfuscate from the American people who has what percentage of the system’s liabilities; given the off-book swaps etc etc as you likely realize. In a sense the so-called recovery has been very limited and also aided by a lot of financial vapor. There is no talk about consumer sobriety or what is a correlation between employment and defaults and delinquencies; nor how retail won’t expand as average working consumers come to grips with new credit minimum and a slew of changes that (to the mild credit of what was done) encourage savings that the majority of the population simply don’t have enough of as they approach retirement. It is fine to argue that’s why they have to invest persistently and without interruption but that’s the same mind-numbing strategy peddled for the preceding ten years without a rousing success if one did forgo timing (unless they just got lucky).

Sure, for example, if one bought in 2002-2003 after we projected the ‘crash’ of 2000, instead of in 1999 when we first warned of the coming secular top (and it was ‘the’ secular top), and if they sold in late 2006-’07 when we emphatically argued to ‘circle the wagons’ for an ‘epic debacle’; then they did great. If they then bought back early in 2007 for the best part of the snapback which ended in January of this year, even better; although the stubbornness of this market may reveal some of the government takeover efforts of our economy, and that clearly has some ties with Wall Street for a period of time now; although it gets very interesting when you contemplate some of it coming off the table with the expiration of TALF and some other stimulus efforts.

True, consumers are deleveraging; while Governments aren’t. As noted this (week), there is one plus.. some smaller stocks are behaving better, and it’s hard to say if it’s a manifestation of money shifting from the overworked bigger stocks; but hopefully at least a bit. Even some of the domestic refiners that have been very suppressed for a long time (most are not integrated oils) have been doing better; as the ‘crack spread’ improves. Most say the Oil rally is incorrect due to low demand; but we’ve demurred on that too (from the false breakdown as we called it around 73) for several reasons.

This continues as a ‘churning’ indecision zone (more than a rebound from the earlier break in the market); debatable as to sustainable advances. And newly overbought on a short-to-intermediate term basis, but only ineutral long-term (which is about right if it’s just an extended effort at snapbacks). Probably that disconnect is why there has to be so many divergent views on it; but our perspective remains that it’s extended as well as certainly riskier than it was a year ago; or even after the nominal breakdowns. (But as you know the S&P 1115 area was indicated resistance; so we backed-off a good bit of short-term bearishness as that area was taken-out, suggesting more than a reflex rebound was underway. Do we still short spikes? Sure; but not opposed to an obvious assault on the higher level as outlined in the nightly videos as trader’s goals.)

I have called this a controlled Depression since forecasting well over two years ago that the Fed and Treasury would facilitate systemic stabilization, but not much more. I regret to inform you that we were and continue correct. It dovetails in that businesses and even municipalities (we know of two) who concurred with our specific expectation back then, circled their wagons, harbored their cash, and properly rode-out the storm.

Conclusion: stabilization efforts notwithstanding; overall recession and deleveraging conditions will prevail (not may prevail) through this year, and probably into next year as well. Intervening rallies in markets will occur (some fairly wild), of limited duration. In event other developments unfold that could truly change prospects; we’ll evaluate.

Bottom line: continuing characteristics; include (consolidated) the following bullet points:

MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks forecast substantive failures by banks or other areas; following breakdown action, as we've outlined. Remember; back in early 2007 we denied the 'liquidity' momentum as a canard; believing housing only the first of the asset bubbles to deflate. We outlined structured investment vehicle failures; banking issues, confluence of asset deflations, and more; continuing with interruptions per projecting long ago: 'a perfect storm'.

As the debt bubbles continue to deflate, alternating tradable moves continue from a trading perspective. Against that backdrop retaining a macro (adjusted) Sept. S&P 1600 +/- short irrespective of interim oscillations.

First, the world’s not coming to an end; b) but it remains destabilized; c) there are other irons in this fire yet to fall, and we’ll see what they ignite; d) there are a lot of defaults and foreclosures ahead (plus commercial property); but e) the edge off a horror show outcome came off for some months as was targeted for the early March low; so f) the shock to the system will be, should it reignite in months ahead (to the downside) with g) questions as to whether the patient is actually off of life-support; not debatable (just interventional financial life-support pure and simple; that may be welcomed, but lets call all actions by Washington what they are, rather than what we may ‘wish’ them to be). It’s a world we now live in.