I don’t know if this meme is true or not, but it may become a political force soon.

On the surface, it is enticing, and rings true. While exporting all of these jobs a few years ago, we suffered the great “Jobless Recovery” of 2003-2007. Our economy has had trouble creating new jobs for quite a while now.

So, what was our solution? 1% interest rates to blow up a giant housing bubble. That’s right; the bubble that destroyed our economy was not an accident or a simple policy mistake. It was an experiment in creating jobs by means other than actual domestic economic growth.

The Ponzi Scheme is America’s official national economic policy.

As far as I can tell, this crisis has not changed the Ponzi Policy, and we are attempting a second round, this time with 0% interest rates.

Good luck with that.

The stock market shrugged off the last jobs report. Maybe it will shrug off the next one a week from today. But what about the next? And the next? And the next?

Many congressmen used protectionist rhetoric to get elected in November, and it likely will not end there. The GGE meme is growing; spreading from one unemployed worker to the next. President Obama has promised to tinker with NAFTA, and some protectionist policies will probably be implemented as a reward to Democratic interest groups like the UAW.

The re-alignment of the global economy could be the big story of 2009. Will Obama still be worshiped as a god in Europe after he slaps on trade restrictions?

If you have ideas, please post. It would be interesting to know which stocks were being bought on heavy volume, if that was in fact happening.

On CNBC Monday morning, Jim Cramer raved about the low TRIN, saying it was a fantastic buy signal. I must say that I am appalled by his ignorance. Every trader who uses the TRIN knows that single-day readings mean nothing and that you have to use a moving average. In fact, the guy who invented the TRIN writes for Cramer’s website! How can Cramer have traded for decades and not know how to read the TRIN?

The Never-Ending Market
This watching the futures and overseas markets all night is really wearing me out. So, I don’t have a good in-depth analysis for Tuesday, but I agree with David, we are hitting a lot of extreme readings and a selling climax may be near.

As I logoff at 1:00am EST, the futures are making a bounce, though you need a microscope to see it.

The Next Bear-Market Rally
The March-to-May bear-market rally was very long, impressive, and sucked a lot of people in. The July-to-August bear-market rally – not so much. Though some sectors were moonshots. If we do get a selling climax soon, I’m thinking that the next bear-market rally might be even less impressive than the last one…

XLF Options
Can somebody update us on that gigantic slug of XLF options that we were discussing a couple of weeks ago? Maybe it will help us see where the big options-trading hedge funds will attempt to pin the market this week. Not that a global financial meltdown is the ideal time to attempt to bend the market to your will…

Watch the comments for updates throughout the day.

Here is what it looks like now:

Notice how SPY tagged my upper purple line on Friday, and then the lower one on Monday. Uncanny, no?

Keep an eye out for these “broadening” patterns. I haven’t noticed one on an intra-day chart yet, but they must be there. They signal wild stuff coming soon.

As Yerk correctly pointed out, Thursday’s candle (the long green one, third from the right on the lower chart) was indeed a bullish engulfing candle. And that was the hint that SPY would tag the upper purple line the next day. However, that bullish indicator then produced a bearish hanging man pattern. It’s not quite so apparent on the SPY chart that it was a hanging man, but if you looked at some other charts like the Dow and S&P futures, it was more clear.

So, that bullish engulfing candle fulfilled its destiny by setting up an overbought condition, and the plunge to the lower purple line.

The moral of the story is that once you have identified a short-term chart pattern, you have to immediately begin wondering what it will morph into next because it never stops morphing.

It’s very odd that the market follows simple geometric patterns so closely, but it has been doing so for hundreds of years. You would think that with all the artificial intelligence systems in there trading with us, that the patterns would be more weird. But so far the AI systems think a lot like we humans do.

Traders seem to be unanimous in their view that the rally was disappointing, especially when compared to previous Sunday-Surprise rallies, and I agree. So, I will not discuss the rally’s defects except for one aspect.

Everybody was expecting there to be panic buying at the open, but that didn’t happen. I think that the gap-up was so huge that many traders who were prepared to barf up short positions just sat there staring in awe at the huge gap – frozen like a deer in the headlights. And since the selling started only 4 minutes after the open, they just sat back with relief and watched the amazing plunge.

But of course, there is an army of traders which focuses on gaps. So as the market plunged toward the opening gap (SPY at $125.10), the gap-traders went long to play a gap-bounce. In the comments yesterday, I wrote that I thought the gap-bounce would be weak. And it was, but it frightened the frozen shorts who were suddenly in a panic that they missed a good exit point to buy-to-cover and minimize the haircut.

So, when that first gap-bounce rolled over, the frozen shorts rushed in to buy, and that triggered a sharp short-squeeze rally into the close.

Now maybe I am just rationalizing the action since I am short. However, we have some proof that the above theory may be true: the futures dropped a few points after hours, and then Asian markets opened badly. So, it looks like the afternoon rally was a retracement, and since it was sharp, it was probably mostly panicky short-covering. And as Charlie pointed out in the comments yesterday, it topped out at exactly the 61.8% Fibonacci level of the retracement of the drop from the peak on September 2 to the low on September 5.

Everybody was expecting a massive rally today and this week, but so far, the market looks like it intends to do the opposite. If so, September could be a replay of June. So, I think I will deploy some more of my cash short at the open, just in case.

The market is still clinging to a bear-market rally (not counting tech!) as the economy continues to contract. So, I think taking short positions here is very low risk assuming a holding period of a few weeks or so.

I am short via S&P futures, SPY puts, SDS, and QQQQ puts, and I think I will buy some QID in the morning.

If you don’t have time to study the chart below, make sure to bookmark this page and come back to it before Monday since it probably signals the end of this bear-market rally.

The chart shows the TRIN and SPY. I have put a simple 3-day moving average onto the TRIN. When the average falls to 0.80, you have a sell signal. On Friday, the 3-day moving average of the TRIN closed at 0.79, indicating a very overbought condition.

When was the last time that this indicator has hit this level? May 15th, June 25th, and July 8th. Those days are marked on the chart with blue vertical lines. After the latter two dates, the market flopped right over. On May 15th, the animal spirits of the bear-market rally kept stocks inching upward for two more days before the rally ended.

Top Section:
TRIN in light blue.
3-Day moving average of the TRIN in red.
The purple line is the 0.80 level of the moving average.

Lower Section:
SPY over the last three months.

Light blue dotted vertical lines are sell signals.

If the market is able to inch higher on Monday as it did at the end of the March-May rally, I will go all-in and leveraged-short with all of my remaining capital. Coming into the week, I was 98% in cash. On Thursday and Friday, I loaded up on SDS, SKF, and SPY puts. Those positions are all underwater now, but I don’t think I will be taking pain for much longer.

Yes, it is psychologically almost impossible to short in the face of a strong market. But I did it at the end of the March-May rally, and I am doing it again right now.

Note: It is pretty easy to make a chart like the one above. I doubt that there are any charting programs that don’t have the TRIN. So, all that you need to do is slap a moving average onto a TRIN chart and check it daily. I used a 3-day period for my moving average because SPY has been wobbling in short spurts lately, but you can adjust the period.

Click on this chart so that you can see it:

Notice today’s high-volume “gap down and die” day as DBB plunged below my lower trendline breaking out of its triangle pattern.

This chart reminds me of the Baltic Dry Index, which may also be rolling over. It looks as if these two indicators took their initial dives around January when it became clear that the US economy was slowing down, but then mysteriously rallied back. I’m thinking that the first move was the real move, and that the bounce back was the fake move caused by hot money fleeing stocks for a new home in commodities.

And now that there is talk of stricter regulation of futures markets, the hot-money tide is going out, leaving us with evidence of a weakening global economy once again.

One day, Jim Cramer will look back on his statement that the US economy no longer matters, and he will have to “wear the Post-It” – the biggest Super-Sticky Post-It that 3M makes. Talk about dumb!

“The moves were initiated by the Fed, which believes that many of the strains in the dollar money markets reflect pressure from European banks that are structurally short of dollars. This view is questioned by European central bankers, but they agreed to take part. The Bank of England did not participate.”

To lower the US Fed Funds rate, Bernanke just clubs it over the head. But an international rate like Libor? Not so easy. And now we see that the central bankers themselves aren’t even sure why Libor is being so stubborn.

Chairman Bernanke needs to get the Libor rate down to try and stop the continuing collapse of the real estate market since mortgage rates are tied to Libor. Mortgage rates initially fell as the Fed began cutting rates, but have bounced back up recently.

Bernanke is trying to fight credit contraction, which is a market phenomena. The Libor rate is higher than the Fed Funds rate because of supply and demand in the international market. Libor is higher either because there lots of banks desperate for loans from other banks (high demand), or because banks in good shape are reluctant to loan to shaky banks (less supply). Or both.

Bernanke is willing to do what it takes to get Libor down, but I don’t think it will ever be politically acceptable for the Fed to inject money into foreign economies by buying huge amounts of their bonds as the Fed does in our market. So, Bernanke will never have direct control over Libor.

And Libor continues to defy. Last week, the Fed lowered rates by 0.25%, but Libor only fell by 0.14% and remains stubbornly at 2.77%, substantially higher than the Fed’s 2.00% rate.

So far, mortgage rates are rising in defiance of the Fed. The enormous number of empty houses in inventory will probably be with us for quite a while. Is it any wonder that home-builder stocks are not participating in this rally?

Earlier in the day, the Wall Street Journal reported that Citi had two internal hedge funds lose 75% of their value – hundreds of millions of dollars, maybe more.

Even worse, the WSJ reported that Citi pitched the funds to retail investors as ideal for a conservative retirement strategy. And those investors are now suing Citi. Today, Jim Cramer called for an SEC investigation of Citi, while Larry Kudlow complimented Citi.

Note to Kudlow’s loved ones: It’s time for an intervention. Larry can’t be left to run around lose during an election year any more.