I didn’t post here for a long time, because there was nothing to say. The most striking aspect of this bloated and misguided rally in its latter weeks has been the failure to allow a natural correction. There is no more story in bounces off every sign of weakness, endless three o’clock hour stick saves, persistent lack of volume, and total program-trading domination of the markets; that story feels much older to me than the several weeks it has persisted.

But a new story may be emerging, so it’s time to start recapping and prepping again. There was significant weakness over the last couple weeks; to watch the market yesterday and today, you would think it had never happened, but it was real, and could not be entirely erased by the perpetual dip-buying.

So what changed this weekend, other than a (very cautious and short-term) bullish call by Meredith Whitney that eerily parallels the Pandit “two profitable months” nonsense from Q1 that helped kick this rally off? Why earnings, of course. The season is upon us, and behemoths aplenty are weighing in this week, thus far “beating” the “expectations” that are a prize Pomeranian in the dog-and-pony show that traders use to justify their ongoing self-righteous and misguided notion that market action correlates with “facts”.

Facts aren’t the issue, but which fictions–the aggregate of our psychological intelligence–are in play is key. To my mind, there are three key scenarios to watch for (and all I’m doing is watching right now, have lost enough money for the year thank you very much) over the next week or so. (Keep in mind, with options expiry on Friday, action is liable to be squirrelly the next couple days, for completely meaningless reasons.)

  1. MODERATION: Some earnings beat or meet, but are priced in; other earnings fail, and weren’t supposed to. In this version, the indices are up for grabs, and we enter a stockpickers’ market phase (vs. the high-beta fully correlated nonsense we’ve been in the entire year). My take? Unless a lot of companies beat ($GS and $INTC are just the blue-chip beginners, and not that surprising), I would expect this scenario to fail to break our recent downtrend, or best case keep us moving sideways. This is the oh-maybe-the-market-isn’t-drinking-as-much-Kool-Aid-as-I-thought scenario.
  2. DRUNKEN CAROUSING: Many earnings beat, and investors have forgotten that this is why we’ve already rallied 40%, so try to drive it higher. This only works out well if volume–the persistent absent guest throughout this rally–comes in. In this version of events, the market is as dumb as a post, but it is important to remember that the legions who have chased the rally since April have received scant punishment for their efforts. Some might say this is the sine qua non of postness-dumbth.
  3. ON THE WAGON: Earnings? Meh, we knew that. What about the economic clusterfuck we find ourselves in to this very day? I have believed, all along, that the truth would play out, at least long enough for a significant correction to occur. There has not been a significant correction, I will remind you, since this rally began. (I do not consider chopping around in the $SPX 875-950 range to qualifty.) I can believe it no longer; the quantity of disregarded bad news these last few months dwarfs our governments’ bailout expenditures. I thus (and only very recently, mind you) find this scenario highly unlikely, unless large numbers of reports fail what are slam-dunk whiffle-ball-on-a-tee low analyst expectations. Oh and this would be a much smarter market than we’ve seen in months; smart markets wouldn’t give a shit what “analysts” “expected”, but would actually, y’know, read the numbers.

You may note that none of these scenarios is particularly bearish, which is the posture my deep skepticism and rally aversion is often mistaken for. This is because I have lost faith in the current market to even tangentially relate to the truth, and because the writers of the trading fictions gripping the action these days are bulls, bots, and cheerleaders focused on the shortest of terms and the greatest self-interest imaginable. In short, welcome to the new equities bubble.

Yes, in a perfect Unexpectedly world, we all wise up, stop gunning and gobbling, and actually fix something before we trade as if we had. I am however now in the process of abandoning all hope that traders will rationally accept the poverty of their risk-reward ratios and calm the hell down any time a long “opportunity” pops up, until they finally have the required correction shoved down their throats. That day will come, but I have exhausted myself waiting for it. Our blind failure to correct our own actions–and nothing says this better than stellar $GS earnings on some very risky “banking”–means we are doomed to repeat ourselves. Until we learn–until we learn–I’ll see you in bubbleland. Enjoy your stay, for its brevity is highly unpredictable.

In short, while I remain as skeptical of this rally as ever, I am now even more skeptical that the number of smart people playing in its traffic remotely approaches the number of greedy fools gunning it up. $GS & friends have some serious bonus money to earn, after all; the rest of us, quite simply, can get fucked. Which fucking is fully underway, and will progress speedily to orgasmic levels once we are granted the privilege of bailing them all out again later this year.

Without further ado, your recaps:

And in case you missed them, here’s the quick rundown on the $INTC earnings that are gunning futures this evening, together with a quick statistical reminder.

Good luck out there. Gonna be some hairy days ahead.