The Stakes Have Never Been Higher – Risk Not Priced In. Short Any Rally.

Last Friday I told you to exit longs and to get short. My market comments have been spot on and I'm certain you have been making money if you followed my forecasts. Please take a few moments to post your review of my blog on Investimonials. Your comments motivate me and I would like to reagin my #1 position. CLICK HERE TO POST A REVEIW Yesterday the SPY dropped below critical support at $136 (100-Day MA). Spanish ten-year interest rates spiked above 7.5% and that is considered the point of no return. Surprisingly, the market was able to recover some of its early losses. I believe that after two years, traders are so numb to the news out of Europe that they don't grasp the magnitude of the situation. Spain and Italy account for 20% of Europe's GDP. Their banks are "tapped out" and they can no longer support their own bond auctions. This means that the ECB, the IMF and foreign investors will have to pick up the slack. This morning Spain auctioned bills and the demand was poor. Default risk is getting priced and like Greece, Portugal and Ireland, we have reached the point of no return where rates just keep climbing. EU members have already been arguing about Greek bailouts. Now the stakes have increased tenfold. To date, the ECB has applied Band-Aids. They have no more power than our Fed and with interest rates at 0%, they are out of bullets. Fiscal reform is needed and it has to start with entitlement. All of the austerity in the world will barely make a dent in deficit spending. Even if Spain and Italy get the required bailouts, it won't stop the bleeding. Europe's flash PMI was in line. As I mentioned yesterday, the reminder of deteriorating economic conditions would weigh on the market. Germany's activity fell more than expected and it is the cornerstone of stability in the EU. Moody’s downgraded Germany's outlook to negative from stable. Analysts are revising Q3 GDP for Europe and many expect a negative number. China's flash PMI was a little better than expected, but it was still under 50. The PBOC has progressively eased and that will provide a bid for their market which just hit a 3 1/2 year low. Economic activity in the US has also been contracting. Analysts are revising estimates for Q2 GDP and 1.5% is the consensus. It will be released Friday and I believe the news will weigh on the market. Next week, the jobs reports will be released. I am expecting dismal results. Most companies have “beat” on the bottom line, but more than three quarters of them missed revenue estimates. This tells me that they are controlling costs and that they are not adding to payrolls. There is too much uncertainty and corporations are content to run "lean and mean". After the close, Apple will report earnings. They should be excellent and there will be a lot of hype around its new product. Shares should be able to hold current levels. Once they release, I believe shorts will get more aggressive. This is the largest market cap stock in the world and it does influence all of the indices. Other earnings have been good, but weak guidance is starting to take its toll. VMW reported soft licensing. TXN provided weak guidance and the September backlog is lower than normal. UPS is considered a barometer for economic activity. They missed estimates and lowered their 2012 outlook. "Increasing uncertainty in the United States, continuing weakness in Asia exports and the debt crisis in Europe are impacting projections of economic expansion," Scott Davis, UPS chief executive officer, said in a statement. Now we will start to hear from cyclical stocks and the outlook will be pessimistic. Pre-announcement warnings in Q2 are much greater than they were in Q1. Analysts only reduced S&P 500 earnings estimates by .8% heading into earnings season. Now, some of them are starting to lower their estimates. The market had a perfect opportunity to run higher last week. European credit concerns had subsided and the economic releases were light. Traders were able to focus on earnings and that is the best thing the market has going for it. When stocks pulled back after good news last Friday, it was a major warning sign. Asset Managers have little conviction and they will not aggressively bid for stocks in the midst of uncertainty. I've been saying this for weeks so it should not come as any surprise. I believe we are on the brink of a major market decline. Option implied volatilities are near three-year lows and risk is not appropriately being priced into the market. That means that investors could get caught "off guard" and the selling pressure could accelerate very quickly. European credit concerns, the slowdown in China, dismal earnings guidance, weak US jobs reports, November elections and the "fiscal cliff" will result in selling pressure. Once the momentum gets going, panic could set in. I am long puts and I am long VXX/VIXY calls. I have a full position on and I have not had this much risk exposure in months. We are also short across all of my research reports. My trades are profitable and if we rally back to my breakeven (SPY 136), I will close half of the positions. The rallies from this point on should be very brief and I will be ready to jump back in. Fortunately, I don't believe we'll see any rallies after Apple's number tonight. Look for opportunities to get short and sell it to any rally. The stakes have never been higher and risk has still not been priced into the market. . .

Daily Bulletin Continues...