The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, January 22nd, 2009.

The terrible price action in the stock market raises the question, 'are we on the right track expecting seasonals and the multiple post-crash historical patterns that have proven reliable in forecasting higher prices moving forward from here to repeat; or, is the market condition so far advanced that these things are known by the investing population, potentially altering the outcome?' This, in essence, is the question of the hour all good speculators are asking themselves right now. This is not the question informed fundamentalists are asking. No, anyone who has done their homework, which is a growing population these days, knows stocks are still expensive by any reasonable valuation model, and should therefore come down from here. In fact, according to Richard Shaw, who has taken the time to perform an extensive review of current circumstances in this respect, based on proper historical valuation standards, the S&P 500 (SPX) is trading above the range it should be, which is between 400 and 800, at the outside.

So you see, what the stock market is attempting to do at present is fall down into this range, which would thwart the efforts of the corrupt and crazies in New York and Washington, bringing it back into a more 'normal' and less hyped up growth condition, which because of acceleration for years, would involve contraction at this time. Of course because things were pushed so hard for years by the bankers and politicos under Greenspan, who among other things was unwittingly good buddies with criminal types like Bernie Madoff in championing minimal regulation of hedge funds (notice Greenspan is quiet as a mouse these days), unfortunately the patient is dead now, which will happen when you don't rest for long periods of time, meaning the lower reaches of the aforementioned range could be easily be tested (or perhaps worse) before it's all over.

Thus, you should know that being invested in stocks right now is tantamount to gambling on the ability of the bureaucracy to game prices higher temporarily before a folding house of cards ultimately comes down to reflect the reality of a hollowed out economy, with the only real question being 'when'. We got that message on Obama's inauguration when the stock market registered the second 90% down day of the year, with Wall Street effectively giving him a vote of non-confidence. And rightfully so with his FRD like dreams and the criminal types he has lined up to manage things moving forward. If you were a foreigner, would you invest 'core money' into a country that is being run by known liars? Unwittingly, in the context of appointing Geithner as Treasury Secretary, who is a known liar, in spite of the bureaucracy's willingness to forgive one of there own, perhaps this will be the unspoken justification foreigners like China will need to stop supporting US bonds. You may have noticed they've sold off with stocks over the past few days.

It appears then Wall Street does not like the picture the Obama team is painting, which in large part accounts for the weakness in stocks undoubtedly, in spite of this time frame normally being favorable in this respect. With reference to the January Effect, or the lack thereof in this case, I wouldn't worry about a poor performance this month in hampering the market's ability to put on some gains into a March / April top, however I would take the markets inability to rally into February options expiry seriously given the US index open interest put / call ratio profile, which was discussed yesterday. Here, and like what occurred this past expiry last week, if stocks fail to respond to climbing index ratios, meaning no short squeeze is ignited this cycle, I would have to take this as an ominous sign given both S&P 500 options series are rising now. This would mean that the credit cycle conditions discussed last week (see Figure 4) are so stretched that nothing else matters, and contraction is immanent.

Certainly the Iceland like sell-off in all things sterling and financials are sending this message, and now that precious metal share speculators are betting bullish we will also be having trouble here now as well, so as much as I would like to think the opposite, the possibility of establishing new precedent moving forward from here appears quite possible, meaning stocks might continue to soften despite numerous reason we can site that should counter such an outcome. Of course one cannot bet on such an outcome given the oversold nature of the markets discussed the other day, so as mentioned on Wednesday, perhaps the best thing to do right now is to go neutral in your portfolios, raising cash until opportunity presents itself. That's what I am doing. I've worked too hard making profits from the bottom in November to give them all back in questionable conditions, so I'm protecting them by strategically raising cash. As stated previously, all the easy money has been made in this bounce, and this is especially true with respect to precious metals shares now with the sentiment change.

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Good investing all.