All The Wrong Reasons

Here is why I do not share the excitement of Friday's rally. Not to take away from the move - it was an impressive one. My worries are based on the reasons for the rally.

Firstly, the new "modality" - ECB / EFSF contemplated bond-shuffling scheme, while extremely helpful in squeezing short positions on short-dated sovereign bonds and resulting in rallies like on Friday, may perhaps be destined to eventually fail, as it does not address the most important ingredient of Eurogeddon - lack of economic growth. You can shuffle all the bond maturities around, but when there is not enough money coming into the coffers of the sovereigns to pay them off, all you get is a different party holding the default-bound securities. And how exactly is this new scheme supposed to break the link between the sovereigns and the banks which will be providing the credit facilities to EFSF in exchange for aforementioned bonds?
Traders, it is all about the EZ recession, and nothing else matters at the end. Keep your focus on the upcoming econodata from the region. It absolutely stinks...

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Secondly, better-than-expected NFP may not exactly reveal the true U.S. employment situation. Under the surface of payroll data there is a worrisome picture.
The all-inclusive unemployment indicator - U6 is going the wrong way. It now stands at 15%, rising further from the low in March.
Another important employment indicator - Household Survey dropped 195K in July. Labor force shrunk by 150K workers, and participation rate declined again.



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So where to from here for SPX? I say it is stopville for shorts just above 1400 followed by craterville for longs all the way down to the bottom of the channels, and perhaps even lower.

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