Don’t Buy This Rally – Window Dressing and EOM Buying Won’t Last.

Last week, the market sustained serious technical damage. Major support levels have been breached and the momentum clearly favors the downside. Currently, the SPY is only $3 away from the double bottom formed in March. A retest of that level is likely. This morning, the Chicago PMI came in a largely as expected. Business activity has contracted for the fifth straight month. Production fell to 45.1 from 51.5 and new orders fell from 56.1 to 52.0. This holiday-shortened trading week will include many economic releases. Construction spending, ISM manufacturing, ADP employment and factory orders will all be released before Thursday. Without question, the biggest number will come on Thursday and all eyes will be fixed on the Unemployment Report. Last month, unemployment had its biggest spike in 22 years. Initial jobless claims have been creeping higher and the four-week average stands at 378,000. Continuing claims continue to be a concern and they have stayed above 3 million. After last month's dismal release, traders are likely to error on the side of caution and they will sell stocks ahead of the number. Light holiday trading could easily take us down to the double bottom formed in March (SPY 126) as buying dries up. The actual number will either spark a major breakdown or a bounce. I don't want to diminish the importance of the ISM services number. It will also be released on Thursday. On its own, it would be significant; however, it pales in comparison to the Unemployment Report. Debt levels are very high and consumers are spending a great deal of their discretionary income on food and energy. If they start to lose their jobs, a recession is inevitable. The rebate checks have been sent and they have not generated the spending that the government had hoped for. Nearly two thirds of the recipients have used their checks to pay bills or to save. Now that this stimulus has passed, consumer stocks are headed for trouble. I am not buying in to today's rally; it is merely an oversold bounce. It is being fueled by end-of-quarter "window dressing" and end-of-month/beginning-of-month fund buying. The VIX is slowly climbing higher, but I have not seen the spike needed for a capitulation low. I am selling the rally and I am shorting retail, restaurant, defense and aerospace. Going into Wednesday's close, I will buy energy and agriculture to get me to a 1:3 long/short mix. I need to have a hedge in case the Unemployment Report is bullish. Use today's rally to short the weak.

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