Erin Burnett, the bubbly CNBC host, is clearly suffering from bubbles in her brain. This morning, she was blathering about how the USA can’t “drill its way out” of its energy problems. She did “calculations” showing that it was impossible.

Of course, it was bubble-heads just like her doing the same “calculations” five years ago that got the USA into the situation that it now finds itself: rapidly transferring its vast wealth to oil-producing nations.

I’m sorry, but this “producing energy won’t produce energy” argument just doesn’t pass the idiot test.

Burnett argued that the USA must break its “oil addiction.” OK, but exactly how much scientific progress can be made on alternative energy technology when the lights go out in the lab? How much progress can occur when your civilization is grinding to a halt?

Here is one of Burnett’s quotes about how men can impress her from Wikipedia:

“Family is important to me, so round-trip business-class tickets to Australia and New Zealand for my parents would earn you big points in my book.”

Burnett’s potential dating-pool of men is rapidly shrinking as jet fuel prices soar. And if she has to rely upon battery-powered airplanes, it might be a long time before she sees her parents again. Maybe Burnett is hoping for a trans-Pacific railroad like Florida’s proposed rail line to Europe.

Ironically, later in the day, Burnett had to read lines off of the teleprompter about how Texas was the USA’s top energy-producing state. Thank god Texas is not filled with bubble heads.

Note: Burnett’s comments were directed at economic Sad Sack, Larry Kudlow, who sat in for Mark Haines on CNCB this morning. Kudlow finally got something right with his new “drill, drill, drill” slogan. This is a dramatic improvement over his previous slogan: “Jump up and down and clap your hands for 0.6% GDP growth!”

The market failed to crash today as I predicted last week in “$150 Oil to Crash Stock Market on Monday.” Was I crazy to predict such a thing on a specific day? Of course, but what do I care? I have no paying subscribers, no advertisers, and no boss, so I can write any crazy thing I want!

But oil looked like it was going to break out there for a while today, right? So, I was close, and if you would have bought oil and shorted the S&P 500 the morning after I posted, you would have made some nice money.

The oil chart remains in a strong pattern. The same bull-flag that I charted in my post is still in effect.

So far, my “Sentiment Sinks, But So Will Market” post seems to be working well. I’m hoping that today’s feeble gap-up open won’t be the week’s only rally since I have some cash that I want to deploy short. But the meme got around fast and I think a lot of traders planning on trying to buy the negative-sentiment this week had second thoughts.

The good news is that the end of the quarter is coming up, and we can expect the big funds to engage in some serious mark-up. Perhaps they will try to paint the Fed’s meaningless announcement on Wednesday with a bullish brush, and ignite a short squeeze. Don’t forget that when volume is light, they can do this any time they feel like it. And there is indeed plenty of short kindling for them to work with right now. So, I will be keeping any eye out for their buy-programs to take advantage of the low, low prices on put options that they create, and hopefully deploy my remaining cash short on Thursday afternoon or Friday.

I have 18% cash at the moment and am just looking for a nice rally to fire it into. Some of that cash was raised this morning when I sold 25% of my SKF position. Doug Kass (this link should be a freebee on TheStreet.com) seems to have barfed up his Citigroup position, so I think that might be a good contrary signal on the financials. Maybe the XLF can mount a throw-back rally up to the March low, where I’m sure it will be rejected. If it can, it won’t be with the help of the big funds who don’t want any toxic financials on their sheets as the quarter ends (as Jim Cramer pointed out today), but short-squeezes can happen at any time. If we get such a rally, I would likely by some more SKF there as it approached the March-low, which is now resistance.

Last week I said that the Russell 2000 was toast. Today it cracked, by my reckoning, as it closed under the “third fan line” from the March low. (I made a lot of money today, so you will have to make your own damn charts!) But look at the SPY, QQQQ, and IWM, which now all have well-established down-trend lines. The SPY is actually threatening to break out of its down-trend channel to the downside.

Ladies and Gentlemen, after this week’s bogus mark-up rally, I will likely declare this market to be a free-fire zone for the bear army.

Yes, it is that ugly.

UPS’s bomb after the bell was no accident. I have been saying that just about all of the news will be bad going forward, and UPS is just another specimen. But there are a lot of idiots that still think that the economy will turn up in the second half. In fact, Maria Bartiromo interviewed two of them after the bell today. The two fools actually stated that the business cycle was turning up and stocks will do well. Idiots! Is the cycle turning up when Detroit is going out of business? When airlines are shutting down? When banks are falling off the face of the earth? Don’t the home-builders usually have something to do with a recovery?

Yes, it is that stupid.

1. Iran’s nuclear facilities are deep underground, and constructed in long corridors that would require extensive bombing to destroy.
2. Israel’s air force is small, and perhaps not capable of flying the necessary number of bombing missions to take out Iran’s facilities with conventional weapons.
3. Iran is not on Israel’s border, and Israel has the same “battlefield access” problem that the USA had when it initiated hostilities with the Taliban in Afghanistan.
4. Tactical nukes may be Israel’s only viable option for a successful mission.

Israel also has to worry about Syria. Recall that during Israel’s invasion of Lebanon during the Summer of 2006, the Israeli’s did not send in their heavy divisions. Those forces had to be held in reserve to counter a possible incursion by the Syrians. The Israelis were forced to suffer a defeat in Lebanon because of the threat from Syria.

The same is true today. If the Israeli air force flies off to Iran, the Syrian air force may see an opportunity to strike Israel. So, this potential war could begin with the Israelis first destroying the Syrian air force in a surprise attack while they are still on the ground, and a simultaneous launch of submarine-based missiles at Iran’s air defenses and nuclear facilities. If the missiles fail, then with the Syrians out of the way, the Israeli air force could fly to Iran and drop a couple of small tactical nukes to finish the job.

Israel’s very public “practice bombing mission” was probably a feint. By practicing the mission with the Greeks, a member of NATO, there was no chance of the secret being kept. So, they make the Iranians watch for an air raid while the real air raid takes place in Syria, and the strike on Iran comes from the opposite direction via Israel’s submarine force.

Why did the USA leak the story to the New York Times on Friday? Perhaps the purpose was to assist the Israelis with the feint. Or perhaps it was a “good cop, bad cop” strategy to pressure the Iranians. (Let’s hope that’s the case.) Or maybe it was the USA’s way of absolving itself: “We tried to deter those crazy Israelis” and perhaps minimize OPEC retaliation.

My guess is that the USA is assisting the Israels with the feint. Even though a $5 gasoline price might be sufficient in itself to lose the election for the Republicans, president Bush has not released any oil from the Strategic Petroleum Reserve (SPR). Why? Perhaps he knows that oil will be needed to deal with a potential Arab oil embargo after the strike on Iran, or perhaps it will be needed to keep the US military’s tanks and jets running in Iraq and Afghanistan as Iran launches its cruise missiles at tankers in the Persian Gulf.

Oil did not break out of its upper trading-range on Friday after news of Israel’s practice bombing-mission was published. The strike on Iran is probably already baked into oil prices, but perhaps a nuclear strike is not.

As the USA drives its collective SUV off of a cliff to collect the insurance money and buy a Toyota Prius, you would think this rather dramatic “demand destruction” would put at least a small dent in the price of oil, but it has not. It is likely that those “in the know” have been accumulating long oil positions in front of the strike on Iran.

On the other hand, maybe we really are running out of oil. On Friday night, Kudlow had on Marcel R. Coutu, CEO of Canadian Oil Sands Trust who said (about 38 minutes into the show) that oil was going higher:

“Longer term, we just see the price moving up further because the problem is that all of the producers around the world who are doing their darndest to add to supply are just not keeping up to declines so, we’re in what hopefully won’t turn into a crisis situation here because it’s pinching in pretty sharply here over the next five-to-ten years.”

Of course, CEO’s almost always paint a rosy picture to boost their stock prices. But Coutu used the word “crisis”, which gave me a good jolt – the man is genuinely alarmed. It’s hard to see how oil loses here until after it causes a global recession.

Barron’s thinks that oil will fall and that was this week’s cover story. If this prediction works out the same way as their “Buy GM” cover story did three weeks ago, then oil will soar. Since Barron’s published the GM story, GM’s stock has dropped from $17.44 to $13.79 – a rather spectacularly bad call – and GM is now “circling the drain” as Jim Cramer put it last week. I for one, will not be shorting oil based on this Barron’s story.

Note: I have no oil or commodities positions, but I am short the market via SDS, QID, TWM, SKF, SPY puts, and QQQQ puts. And yes, I read Debka every day.

Some measures of investor sentiment have sunk to extreme lows, which in the past has been a good contrary indicator and a buy signal. For example, see the chart of the Investor’s Intelligence Survey at Bespoke. SentimenTrader.com also publishes its “Dumb Money” index, which is literally 100% reliable. (If you are not a member, but are a RealMoney.com member, you can see the latest chart here.) And there are more such indicators.

Do not ignore these indicators. They are now a piece in the puzzle and all pieces must fit.

So, how does the piece fit? First, prices are the best indicator of sentiment. If you look at the IWM chart, you will not see any fear, let alone panic. The QQQQ chart is looking shaky, but again, not panicky. The SPY chart looks unpleasant, but also not panicky. Even the XLF chart is not falling off the face of the earth, but is in a well-defined down-trend channel. However, if you look at the DJIA chart, you will see impending doom. Of course, the DJIA is a price-weighted index, and means nothing. However, a lot of traders are still in the habit of looking at it, and I suspect it has an out-sized impact on the sentiment surveys.

So, some of the negativity is un-justified at this point, and that is proven by the Vix. The DJIA was not scary enough last week to motivate an excess of put buying. Neither the Vix, nor the sentiment indicators, are down to their March lows yet. But they will be. They will be. Historically, the S&P 500 rarely strays far from the banks; see the chart here. And since the banks are testing the October 2002 low, so will SPY – unless “it’s different this time.”

There is room for sentiment to worsen before we get a negative-sentiment rally. See the article here for Ned Davis’s opinion:

“We may need more extreme pessimistic sentiment before we can call sentiment clear-cut bullish.”

Negative sentiment doesn’t just pop-up out of nowhere. In fact, it is negative sentiment that is causing the market to fall here. The wheels are coming off of the banking system and the economy, and the crowd has it right. If you have read The Wisdom of Crowds, you know that groups of ordinary people can perform jaw-dropping feats of computation. It’s not a good idea to fight the crowd while it is rational. You can only beat the crowd when it goes crazy, and traders have not reached that point yet. But it is coming, and that would be a good time to take some profits on short positions, and definitely not a good time to press short bets.

A few years ago, Laszlo Birinyi published a detailed study of sentiment surveys and found that they are not good timing tools. I think that they are important indicators, but can’t be used for short-term timing. Birinyi probably agrees that they are important now since he now publishes his own blogger sentiment survey every Monday.

Nevertheless, there is a group of traders gearing-up to bet on a negative-sentiment rally this week. One example titled “Brazen and Raw Negativity” comments on the extreme negativity of hedge-fund managers:

“Have all of these managers already made their negative bets? Who is left to sell or short?”

This group of traders trying to fade sentiment will be defeated in the coming week. First, additional short sellers are not needed to push stocks down. All that is needed is for bids to be pulled, and stocks can free-fall. Also, short-sellers are not the only sellers in the market. The public is still sitting on some very nice gains in tech stocks, and Russell-2000 stocks, and they will rush to lock-in profits as soon as the QQQQ and IWM crack.

There is also no potential good news coming that will reverse the market. Banks are still white-washing the numbers and plan to continue doing so, the Iranians will not give up their nuclear program, the economy is continuing to contract, and while some earnings reports may be OK, guidance for the next quarter will almost certainly be reduced for most companies. The Fed is being conspicuous in it’s silence over plunging bank shares, and unless a giant meteor filled with oil crashes into, and fills the Grand Canyon with light crude, there is no catalyst to spark a rally here.

So, all the pieces of the puzzle fit like this: some traders will bet on the sentiment data this week and cause one last rally. It will fail, the market will plunge through the March lows, sentiment will pin-the-needle on the gauges as befits this historic crash, and at the height of the panic, some short sellers will begin to take profits. Their buying will trigger a vicious snap-back that will squeeze the late-coming shorts and burn off all of the negative sentiment. Then the next leg down will begin, and will run until there is some sort of spark-of-life in the economy.

I would put some more detail onto the above scenario, but this post is long enough as it is. You get the idea though, right?

A few more notes:

Item: Take a look at the QQQQ chart. Notice the sharp, and very high-volume rally on Thursday. I believe that was the “last hurrah” for tech as it could not break-out even with oil falling almost $5. The chart pattern is now almost identical to that of SPY when I correctly predicted its demise in “Stick a Fork in the SPY” on June 3rd. QQQQ closed under the “third fan line” on Friday (as I draw the lines) and IWM is very close to doing the same.

Item: Jim Cramer has turned rabidly against financial stocks. While late-to-the-party, he usually arrives in time to make a few bucks. However, he is still in denial about tech, so that is a sign that there are lots of bulls who still have not barfed-up their pet techs. I will likely be adding to my QID position this week.

Item: Stick a fork in the XLE. Homework: draw three fan lines from the March low and you will see that XLE has rolled over. NOT good for the S&P 500.

Note: I have some ideas about the Israeli/Iranian situation and will try to post them tomorrow.

Many bullish forecasts are primarily based upon the Fed reducing interest rates to 2%. Back on June 9th, I predicted that the rate cuts would do nothing for the economy in a post titled “Bernanke Shoots Blanks“.

On Friday, my meme made it to Kudlow. At about 8 minutes into the show, economist Arthur Laffer (inventor of The Laffer Curve), made the same points that I made. Here is one of his quotes when Kudlow tried to counter with the Fed’s loaning of treasuries to banks:

“…that doesn’t expand the ability of member banks to make loans.”

Exactly! The Fed “stimulus” is doing nothing because the banking system is broken!

Note: Laffer cited the monetary base, and I use the True Money Supply, but it is the same difference.

Everybody knows that the tax-rebate checks provide only a temporary boost for retailers and create no jobs. Everybody knows that second-half earnings estimates need to come down. And now everybody knows that the Fed is powerless to stimulate the economy.

The bulls have nothing to support their argument except for some improperly-deflated GDP numbers, which nobody seems to be taking seriously any more.

I don’t know how many traders watch Kudlow on Friday nights, but Laffer’s comments will get around and bids will soon disappear.