Not Out of the Woods Yet

 | Aug 24, 2011 | 6:57 AM EDT
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Every one of these rallies is met with the same set of queries: Is it real, have we seen the bottom, is this the start of something new.

I think these are all super questions that need to be answered. But the only way I know to answer them is to go over a "to be done" list of questions that will answer these queries, a list of questions designed to figure out if things have really changed or whether prices of stocks changed and nothing more.

Yesterday was more of the latter.

What makes me say that?

Because my checklist is pretty bare, that's why.

To refresh:

1. I want to see leaders back from vacation worldwide showing actual plans to get the economy moving again, especially employment creation. Right now we are in "See you in September" mode and nothing more. Ben Bernanke doesn't count. He's already been the Scotty from Star Trek -- he's been given her all she's got for a real long time now. He's a short-covering phenomenon at this point -- witness yesterday -- because when he spoke last time the market ripped higher. Remember, we are on recession watch and I didn't see anything yesterday that made me feel that the U.S. is on less of a collision course with recession.

2. We need to see the banks stop going down. What can I say? The European banks aren't rallying, American banks rallied somewhat but the only bank that mattered -- the boxed-in, cornered Bank of America (BAC) -- WENT DOWN! The bear prosecution rests.

3. Seasonality for tech has to run its course. That's a calendar issue. We are about to go into the single worst weeks for tech every year. I am supposed to get excited when Europe's weak, Hewlett-Packard's (HPQ) imploding, and government spending on tech is awful? Is that the ticket? Plus the consumer's punk, so what's the reason to waive seasonality worries?

4. If prices are really too low, we should see a wave of M&A, as we did in the stock market crash of 1987. I do not think that Kinetic Concepts (KCI) qualifies as a wave.

5. We need lower stock prices and lower gold prices. The stock prices are just fluctuating around this Dow 11,000 battleground -- I know technically not that important but if you step back, that's what's been in play. Gold? One day down does not do it. Gold is a symptom, not a cure. The temperature went down big yesterday, and it is creeping back up today.

6. Europe has to declare itself a Lehman-free zone. I don't see anything like that happening until the leaders come back. Right now European banks remain the single biggest third rail in the world, and you can't touch their third rail without being electrocuted here.

7. Brent has to go below $100. I don't see that happening as demand is still high despite the worldwide slowdown, and Libyan infrastructure may not be that damaged but it seems a lot more like anarchy than despotism ... and despotism is better for business.

8. The Chinese have to declare victory over inflation. This has been a major sticking point the whole time this selloff has been in play. We need to see a soft landing. We got a soft-landing number, which is a big reason we could have a rally yesterday, but, like everything else, whether it be a one-day decline in gold or a one-day decrease in German GDP, one-off numbers just can't be relied upon. The only number that has been consistent regarding this issue is the Baltic freight, which has been real good for a nice stretch. But that's not enough to hang your hat on.

9. We need to see something genuine involving the reform of the euro. Here we've had a big step back because Greek bonds are yielding 40%. We will get nowhere on this until the leaders come back, but we are nuts to think we can have a sustained advance while all the Europeans do is buy bonds in the secondary market.

10. We need stock leadership. We got some of that yesterday, and it is gratifying to see how much an Apple (AAPL) or a Chipotle (CMG) can come up. That's why I like the deep-in-the-money call situations so much. That said, it felt more one-day wonder to me, and I would have preferred nice stairsteps up and not these gigantic moves, because that tends to show me that we are in the grips of high-frequency trading to the upside, meaning that the HFT people simply pull their offerings and the market lifts higher so quickly that nobody real can get out to sell. So they end up selling in a down tape, not an up one. Felt squeeze-ish.

Now, the one question I am not willing to answer is, "Have we seen the bottom?" and I am not willing to do that because the bottom requires more checks or it is just based on charts or on gut belief. This is way too hard a market to rely on your gut. We have to wait for the evidence that's needed to be more confident to surface. Otherwise the next big HFT-aided downdraft will simply shoot any confidence to hell and we will be back in Euro-pulled purgatory.

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