The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, March 18th, 2009.

As postured on these pages for some time now, seasonal inversions in trading patterns of markets tend to occur in mature markets due to sentiment / structural irregularities. In the case of the US stock market, what has essentially occurred is because the general investing population has been 'dumbed down' due to excessively good economic conditions over an extended period, along with powerful mind-numbing corporate propaganda, their aversion to risk has been dangerously tempered. This has caused them to adopt a casual attitude towards risk, and explains why such a large percentage of small speculators, who have proven themselves to be the 'dumb money' once again by increasing long exposures to historic extremes set against falling prices, remain stubbornly bullish to this day. In essence then, they are simply too dumb to respect risk evidenced in their persistence to game the market, which is why stocks have fallen in correspondingly record fashion as well. As Mark Lundeen points out in his latest, only the crash of 1929 to 1932 saw greater volatility than the present sequence. As he goes on to point out however, this of course does not mean total losses in stocks will not match the extremes witnessed in the 30's, which is supported in knowing just how complacent investors are in the face of stark reality.

And it's this denial of reality that has caused the five-wave impulse into last week's low and possibly sponsored a seasonal inversion of the trading pattern this year, which would mean a low of intermediate-term degree occurred last week assuming a successful test is witnessed by options expiry on Friday. If this test does not occur, which would mean investors likely remain too optimistic to sponsor a lasting bounce, and likely borne out in post expiry open interest put / call ratios and Commitment Of Traders (COT) data, then a seasonal inversion could probably be bypassed, with the present bear market potentially taking the volatility record away from the 1929 to 1932 sequence. As stated yesterday, I am not predicting this, but it could happen. So you see, it's important investors capitulate to some degree this week with at least a 'test attempt' of the lows along with key post expiry put / call ratios making a lasting turn higher in order to sponsor a squeeze. If this does not transpire, after some possible post expiry strength, stocks could surprisingly plunge once again, which would financially injure yet another strata of semi-savvy speculators who have taken on long positions for the anticipated contra-trend rally.

So again, and as mentioned Monday, we will be watching this week's market action along with next week's post expiry options distributions with great interest in gauging probabilities associated with a possible seasonal inversion of this year's trading pattern. In terms of gauging probabilities associated with a test of the lows occurring this week, Monday's reversal was supportive such an outcome, with continued call buying increasing these chances. Of course un-welcomed strength yesterday countered Monday's losses, which is disconcerting. Furthermore, because this is a global affair like no other in history, strong equities in Asia early this week is making certainty associated with such an outcome somewhat questionable, however if US market internals remain dominant, which has been the case, then stocks should weaken considerably as the week wears on, which would yield the anticipated test. In doing so, this would signal to us a significantly increased probability a profound sentiment change will be marked this month, from predominantly bullish on the part of small speculators towards increasing bearishness, where when combined with historical precedents and market technicals / internals (see below), would be sufficient to sponsor a lasting contra-trend rally in stocks around the world. (See Figure 1)

Figure 1

Past this week, and as with our previous comments regarding the importance of a strong finish last week, which was in fact the case, equally important will be a strong monthly close, which will signal not only a change in sentiment on the part of speculators; but more, an increased willingness to accumulate and hold stocks on the part of institutional investors. In terms of the technicals displayed in the chart panel above, it's important to notice the positive divergences in the indicators, where breakouts to the upside would signal a meaningful advance in stocks was underway. What's more, it should also be noticed targeting associated with such a move could involve a rally all the way back up to the large round number at 1,000, which is a possibility that will primarily be determined by the extent speculators turn bearish on stocks. That is to say if speculators turn only mildly bearish on stocks, not being fully exhausted in their bullish aspirations not to miss the bottom, then the contra-trend rally will be correspondingly shallow, which is why we will continue to closely monitor sentiment as any rally progresses. Nothing will be taken for granted on our part in this regard, as it's important to remember any strength exhibited in stocks over coming months is of the corrective variety, meaning any rally must treated as suspect.

Again however, this of course does not mean a substantial rally will not ensue, where again, speaking strictly from what is considered a minimal 'standard' Fibonacci retracement after such a dramatic move down, a move back to the 38.2% mark in the proximity of the large round number of 1,000 on the S&P 500 (SPX) is a distinct possibility. Moreover, this possibility is fortified in knowing that comparatively speaking to the crash pattern in the Nikki, which can be seen here, at this point in the sequence the SPX would only be down 35% in mirroring the Japanese experience, which corresponds to the 'normal' retracement discussed above that would put prices back in the proximity of the large round number at 1,000. If this does in fact transpire, you can think of such a move as a test of the break of the four-figure mark, which will undoubtedly prove to be meaningful in terms of an ultimate low, as well as in terms of duration of the bear market. (i.e. how long stocks should be expected to remain depressed.)

The question then arises of course, if investors do not turn sufficiently bearish to create a 'wall of worry' for the bulls to climb, then what will sponsor a rally moving forward, a sharp rally that could see the SPX move all the way back up to 1,000. In the first place, there's no guarantee a 'standard' minimal Fibonacci retracement is in the cards prior to stocks resuming the primary trend lower, where as mentioned above, the present contra-trend rally could be quite shallow (21.8% - a common Fibonacci derivative under such circumstances), with speculators remaining insanely bullish for an unfathomable period of time, just like the 1929 - 1932 sequence. I'm beginning to think this is an increasing possibility after yesterday's rally in stocks, and this view will be strengthened if this week yields no discernable test of last week's lows. That said, and irresdpective of the ultimate outcome, being long equities post options expiry this Friday is likely a good idea from a speculation point of view because in doing the math, at a minimum the broads still have approximately 10% of upside remaining from a Fibonacci retracement perspective. This, added to the knowledge post expiry this Friday all earthly constraints will be removed from stocks running into month's end from a options (sentiment) perspective, along with continued buying forcing more hedge fund buying into month's end, should yield higher prices sooner than later.

More reasons stocks should rally in coming days can be found in other areas as well, such as increased quantitative easing measures, new international quantitative easing measures, and possible accounting rule changes, where some might consider such developments positive fundamental changes, but in reality are of course nothing more than desperate fiscal / monetary measures that will have little lasting power now that the larger credit cycle has turned lower. Or it might simply be a weaker dollar ($) that's sufficient to do the trick (for whatever reason), which you may have noticed is now apparently good for financials and bad for gold according to the 'boys from Brazil' (BFB), who live in New York, Washington, and Chicago. (i.e. and have visited Jekyll Island.) Like in the story penned by Ira Levin, those running our financial institutions these days are a bunch of little Hitlers who know no bounds to greed and the desire for power. Did you see the latest one from Goldman Sachs? Now they are proposing to lend money to their employees in an effort to keep milking the system while attempting to avoid public scrutiny. I guess this means they intend to run the company into the ground so the loans need not be paid back later on. Let's hope this happens to all the banks, no? I could go for a good old fashion Jubilee. That would clear the books in a hurry.

Either way, and like Adolph, the BFB are bound to run into increasing trouble sooner rather than later in my opinion, with a blow-up in the precious metals market a likely trigger for the big banks. As you may know, the big banks have a meaningfully concentrated short position in the silver market that is in jeopardy of finally getting away from them if 40 days of backwardation in the market is any indication. It's said silver is the most heavily manipulated market in the world given present circumstances, and this assessment is likely correct. With chronic physical shortages around the world now apparent however, at some point the BFB are bound to be exposed, which will send prices soaring. A pronounced loss of confidence in the system would do it, with the masses increasing turning to poor man's gold (silver) to escape the chaos as the metal of kings moves well into four-figure territory. And you know the best part of the move is still ahead of us in the observation the masses still prefer to game stocks higher as opposed to grounding their wealth in precious metals, which is a sentiment that is confirmed by our studies associated with the stock market. (See Figure 2)

Figure 2

As you can see in the above however, where head and shoulders patterns are present in the trade of both precious metals shares and gold itself, the BFB love to hate gold, and will take every opportunity to minimize them whenever possible. And it just so happens they will use those times that investors are enamored in buying paper to do so, such as now, with the cyclical contra-trend rally in stocks now underway. Of course the level of success they have been able to engineer lately has become increasingly shallow as not only are they running out of physical metals in meeting the demand from more knowledgeable and wealthy investors; but more, as volatility and fraud in the paper markets becomes more apparent, increasingly marginal buying is coming in from new audiences. Of course the silver market only trades $1 billion per annum at present, meaning the move into the metals is still in its embryonic stage, with the best yet to come. So, make sure to continue accumulating the physical metals while the opportunity still exists, because once a panic to acquire safety ensues, it will be too late, of this I can assure you.

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Good investing all.