The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, June 1st, 2009.

As suspected last week, mutual and hedge fund managers could not resist the temptation to push stocks higher in month end window dressing given the opportunity, so they did. And I wouldn't doubt for a minute the bureaucracy's price managers were told to make stocks look good at week's end because of Geithnier's trip to China, where he is on his first official US paper selling junket. There's really no other explanation for why stocks mysteriously surged at the close on Friday due to futures buying. (Later Monday we found out it was broker related buying to aid their secondary issues the following week.) Nobody, and I mean nobody who was spending their own money, would have placed a market order of that size at the close unless they did not care about losing money and / or wanted to affect the price in a meaningful fashion. So, while it's only speculation this was done in government accounts, never the less, the point is somebody jammed the market higher at the close on Friday in painting a false picture, rendering a 'paint job' that even Picasso would have been proud of, no?

Now that we are past month end however, any efforts to repeat last week's performance will be far more difficult to reproduce, where like Treasury Bonds, price managers would need to increase stock market monetization efforts to levels that might worry even the crazies in New York. Good art doesn't come cheap though, which is of course why Geithner is in China, attempting to gain increased support for US paper markets. And he may get this support at the expense of the IMF's gold, which would be the trade off. Such a move would increase Chinese gold reserves substantially in short order, giving them what they want, in exchange for heightened support of US Treasury purchases, which would help to keep interest rates low. If successful, this could help stocks out temporarily in tracing out a more elongated recovery pattern than would be the case under a 1929 to 1932 sequential repeat (see Figure 1). The jury is still out in this regard however, meaning although it's always possible a stronger bounce higher will prevail, as you will see below it's not a higher probability based on thoughtful analysis.

Naturally such an outcome would be frustrating for stock market bears with fundamental factors worsening every day. Companies are cutting dividends because earnings are crashing, however right now this doesn't appear to matter if one is simply looking at stock market performance and not how prices are being artificially jammed higher. Of course manipulations never work for very long, so even if Geithner is successful in wooing the Chinese back into stepped up support of US paper, such efforts will undoubtedly prove futile in the end, as is always the case. This perspective makes a great deal of sense when one realizes that with an estimated $2 trillion in deficits this year the necessary Treasury buying will need to be four times that of last year alone. So you see even though money supply measures are not correctly reflecting this stepped up largesse, as stepped up monetization is occurring already, never the less an exploding monetary base is with us, making the stock market's lack of response to this condition scary to say the least.

Is this because the bureaucracy wishes to hide the inflation? Perhaps, however as you know from our previous work on this subject matter, money supply growth rates are only part of the equation in equity markets, with the other half of the formula being speculation trends. And as I was alluding to above, with speculators bullish on future prospects for stocks, while it's always possible the bulls get their way longer, difficulty associated with levitating equity prices should become increasingly apparent as options expiry approaches in three weeks, where at some point such efforts are should fail if history is a good guide. So, while price managers might go the full distance in supporting stocks until Geithner heads home on Tuesday to make it appear the administration is in control (when in actuality they got lucky), with all the shorts blown out of the market now it's going to be very difficult for these jokers to keep this act up with little buying coming from an increasingly bankrupt public.

This, along with sentiment related considerations is why a sharp decline that would mirror the 1929 to 1932 sequence is still possible if prices start dropping in earnest this week. If you check out the pattern attached above closely however, stocks must begin to drop this week for this to be the case, with continued strength signaling a more elongated recovery pattern is in the cards. In terms of 'who is leading whom' when it comes to the larger formula in this regard, I can tell you from previous experience that if history is a good guide, stocks should reverse hard soon and cause the dollar ($) to break back above 80, setting off the next intermediate degree move higher. (i.e. and lower for equities.) This is because its speculation trends in stocks, and how stocks behave on a lasting basis because of this factor, which drives the trade not just in equities, but also in commodities and currencies as well. So, the thinking is as liquidity dries up with falling stocks, speculators will continue to collapse margin / debt levels, which will reinforce continued contraction in equities as a deflationary spiral takes hold of macro-conditions once again. Thus, in terms of annotations on the chart below, the question is 'are we here yet'. (See Figure 1)

Figure 1

As I write, based on the way foreign markets and the futures are trading, it appears the 233-month exponential moving average on the S&P 500 (SPX) is about to answer the above question with a resounding 'are you kidding - the future is so bright we should all be wearing shades'. However one must remember the cash market has only been trading for 5-minutes within the context of a 30-point futures related 'jam job', so again, in my opinion it's fair to say the jury is still out in this regard. Myself, although Da Boyz appear determined to take out the 200-day moving average with a flag breakout that can be seen on the daily here, I think this is a good short selling opportunity, where based on historical precedent under similar circumstances / and trading patterns, even if a more elongated recovery pattern becomes reality, the upside from here would be minimal. That is to say although this recovery could last well into next year if the pattern mirrors the post crash Nikki bounce, a period of consolidation should set in soon that will enable short sellers to cover tenuous positions later on if the sentiment picture morphs. So, taking on short positions into this contrived rally is a 'fair bet' in my opinion, one that has an identifiable out later on if stocks do not fall off their apple cart here.

Further to this, and in taking a good look at the variable factors that matter, it's important to note not only are small speculators still at meaningful bullish consensus extremes on the Dow, SPX, and NDX (NASDAQ 100), but that open interest put / call ratios on the tech related indexes (NDX, MNX, and QQQQ) have not increased since last month's expiry, making out-performance here very unlikely as the next expiry approaches on March 19th. This of course means that comments regarding prospects for the NDX / Dow Ratio discussed in our last meeting should ultimately prove correct, if not immediately. What's more, we should not forget that from a technical perspective the NASDAQ is presently testing a profound long-term channel break, where even if the test is as sloppy as the thinking down at the Treasury department, it should hold in knowing the sentiment picture outlined above, with the bounce ultimately failing in coming days. (See Figure 2)

Figure 2

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Good investing all.