The bulls are running wild.  When I said the market was likely to rally from the 666 level I never envisioned a 5 day 16% move.  While many view this as bullish action I view it as incredibly bearish action.   It is textbook bear market rally action.  Sentiment has swung viciously in the opposite direction of just 10 days ago and now the bottom callers are out in force.  Everyone is talking about the bottom in the economy even though there are little to no signs that a bottom is close.  This market is literally no different today than it was 10 days again when the Cassandras were all out calling for Dow 5,000.

As we said last week, the financials have been dragging this market around by its nose and the further 12% move I said was likely has nearly already occurred.  Currently, the financials sit just 3% below their 50 day moving average – a level they have been unable to decisively break and hold throughout this bear market.    I have never liked technical analysis.  In fact, I hate it.  It is like reading Shakespeare with color pictures mixed in every 5 pages or so.  Unfortunately, enough people read the pictorial version of this Shakespearean play that it has a psychological impact on the outcome and one of my primary goals is to understand the psychology of the market before the psychology changes.   You have to get into the mind of other investors before they even know you’re there.  TA becomes particularly useful when the fundamentals of a market become completely derailed as they are now.  The financials are a complete black box.  No one really knows what the true value of their assets are (although many of us have an educated guess – I’ll give you a clue, the number begins with zero).  The bulls and bears rely as much on the charts as the SEC filings in this kind of market because the news is all over the place.  One month 600K job losses is a good thing and then next month it’s a bad thing.  After a 50% move in the financials (in just 5 days!) I believe the move up is a bit long in the tooth.   That doesn’t mean we can’t move higher, but the odds of the wheels coming off the bus have increased substantially at these levels.

The market is fixated on the M2M accounting change, uptick rule change and the latest and greatest version of the Geithner bank plan which makes the next two weeks a real coin flip.  Shorts will be very hesitant to jump in front of policy action, but once earnings season gets into full swing in early April I expect this market to once again focus on the fundamentals and the truth about corporate earnings will once again (unfortunately) be revealed.

I would be very cautious here.  The chances of a 500+ point downside move have increased dramatically.