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

As suggested in our last meeting, and supported in continuing technical analysis by Dave (which you can review at your convenience on the site), equities have yet to top out, however we are likely within just a few days / weeks of such an event. And as you know from our ongoing discussion of the seasonal inversion which we have posited as the causal factor behind ongoing strength in equities / stocks through this normally weak period that occurs yearly, this analysis jives with such a view as well, setting the stage for an important top stocks to be put in place sometime between now and the end of October. (i.e. or possibly the beginning of November, but it's unlikely to run that long past a testing process, possibly in the form of a double top.)

Before we delve into the reasons why the present seasonal inversion could extend to an extreme (October), its important to understand that as Dave points out in his latest analysis of the S&P 500 (SPX), while its always possible stocks fall off sharply and never look back considering present fundamental and technical circumstances, a testing process of any such top could be necessary as we move into stock strength season, so one should shape your expectations based on this understanding. This is of course especially true of those with intermediate-term short positions on, where in knowing it could take until spring / summer of 2010 for significant downside to occur, one does not get chased out of their positions prematurely.

You will remember that in spite of the top in stocks that took place in October of 2007, which is an example of another speculator sponsored seasonal inversion in the annual trading pattern, it was not until the summer of 2008 a decline that shocked then exhausted bears took place (you need bears to buy puts fuelling any short squeeze big or small), which may repeat this time around as well depending on aggregate betting practices and money flows into the market. Right now, despite what may appear to be an impressive run-up in stocks that has transpired since May, the market can probably best be characterized as a casino with most all of the gamblers betting on black because the house (the bureaucracy) has rigged the outcome this way as it was to their advantage.

Be this as it may, at some point, and in spite of desires of the house, red will be seen increasingly much to the surprise of the gambling population, and it will be realized the house has lost its ability to rig the outcome. This is when the gamblers will sell, all attempting to get their orders in first as red keeps appearing on the roulette wheel. And like a nightmare it will not stop because by the time all the funds / investors push prices higher into what looks to be a manic quarter-end window dressing related jam job this September, cash levels will be low and leverage high, forcing a reversal of the lunacy that caused the parabolic rise in stocks over the past six-months. Below is an email response to a subscriber who appeared aggravated by the fact stocks keep rising, attempting to set the tone of what to expect in spite of this, as follows:

"With hedge / mutual / pension fund related window dressing into month end and room for the financials to run as per my analysis last week, the SPX can run to 1120, the 50% retrace from the 2007 highs. After this, with stocks as overbought as they were in 2007 from both technical and sentiment related perspectives, logic dictates a halving of stocks is possible once again, potentially sending the SPX down into the 500 area. This is now my minimum expectation for the next wave down in stocks, with a move down to even lower lows than this if the Grand Supercycle correction is the dominant driver at this time, which logic dictates is a high probability.

So, the best strategy I can see moving forward is to get short stocks at 1100ish on the SPX in knowing the funds will have expended all their cash by quarter / fiscal year end for the fashion show (look good from a competitive perspective), meaning they will have low cash levels and all the money working. Then, as 500 on the SPX comes into view next year, take profits and use the proceeds to buy more physical precious metals. And yes, I think the SPX could drop that fast into next year because little cash is coming into stocks from investors, as they are broke in aggregate. Thus, once the funds expend all their available cash and ramp up margin going into month's end in a window dressing related fashion show, they will have little to no ammo left over to support stocks, and down they will go. Moreover, these idiots topping up their portfolios now will be the same idiots selling at the bottom, which is the dynamic that causes these wild swings.

All we need to do is monitor sentiment all the way down to know when it will be safe to get long stocks again, which will be when these guys realize their losses could actually be permanent and abandon their positions. (i.e. which will be reflected in put / call ratios.) All this assumes the stock exchanges are not shut at some point due to illiquidity / structural problems of course, which I am weary of as well. The bottom line then is this is one of the sweetest shorting opportunities you will ever see, to be followed by an equally sweet precious metals accumulation point. (i.e. assuming gold and silver do not diverge.) This view will dictate my primary strategy in portfolio planning over the next year, and I think subscribers should consider well thought out participation, with their personal risk tolerances and objectives in mind of course."

In reference to comments above regarding technical and sentiment related overbought conditions, its important to note that both bullish percentage and advance / decline lines (amongst others) are back to extremes witnessed at the top on October of 2007, which is important evidence supporting the hypothesis the turn in stocks witnessed in coming days to finish off the present sequence will be quite important, meaning of high degree. (i.e. possibly Supercycle Degree within a Grand Supercycle Affair to mark the end of the American Empire, the global economy, and present day fiat currency regimes.) So again, if stocks are able to rally into month's end on window dressing related buying, my advice is to sell / short stocks of all varieties, even those of the precious metals variety. (i.e. I would never short precious metals shares, but I would sell even core share positions [never bullion] in knowing what potentially lies ahead for the stock market at large.)

Quite simply, price managers have literally gotten lucky of late in their endeavors, which accounts for the veracity of the rally in stocks. What has happened is they have had the benefit of both bearish speculators (put buyers and short sellers) and desperate / half-witted bulls to exploit simultaneously, which has sponsored the bubble extremes being witnessed today. And if stocks continue to rally into quarter end, and possibly beyond as the seasonal inversion extends to the extreme, make no mistake about it, this would just be more luck as well - luck combined with heaping doses of complacency and miscalculation that will need be dealt with in the not too distant future. That's when good luck (only for the bulls that sell) will likely turn into bad fortune as stocks turn lower, possibly never returning to present levels within our lifetimes.

Could this really happen? You bet it could because baby boomers are changing their behaviors based on changing needs. And increasingly they will need to take more out of the stock market than they are putting in, which is already part of what the Fed is fighting via its monetization practices. Unfortunately however, unless the Fed plans on monetizing the entire stock market (or perhaps because they are trying now), at some point these practices will get out of their control, and something will snap, whether it be bonds or stocks, and prices will head dramatically lower. Of course in the meantime, which looks to be in the context of just the next few weeks, prices could continue to squeeze / grid / shoot higher in manic fashion, putting the finishing touches (sentiment / technical) on the present counter-trend rallies in equities / re-inflation attempt on the part of our price managing / self-serving bureaucracy.

This sentiment is well reflected in the three ratio we are about to study in gauging probabilities here, where for example, the chart below shows that while core developed economies (we will not include Canada here due to its reliance on natural resources) may never see the extremes witnessed in the tech bubble (year 2000), it would not be surprising to see sentiment related extremes established last year tested in coming weeks. You should know that's what we are measuring in the various stock market ratio plots presented here today. We are measuring relative frothiness in stocks using international indices and specialized markets that will show increasing relative strength the more mature our present mania becomes. In these terms, the big message of the above put against the other ratios below is technology does not matter anymore, as we have gone as far as we can go, where the peak in man's ability to innovate in this regard we witnessed in the year 2000. (See Figure 1)

Figure 1

That's right - when you understand the story these three ratios are telling you, one would realize the message is that barring a technological breakthrough that empowers man's ability to exploit the natural world more efficiently moving forward (peak oil will not permit this), any further economic growth will solely be the result of monetary inflation, which of course is borrowing from the future. Some would argue China has unlimited demand, and is outside of such considerations, however this brand of dangerous thinking is poppycock, reserved for the bureaucrats, bankers, and brokers attempting to game their paper empires into continued wealth generators for themselves. Be that as it may, they will continue trying rest assured, meaning more gaming should be anticipated. And if the plot below is any indication, we could be on the cusp of a sentiment related spike in coming weeks that will measure comparable to the extremes witnessed back in the mid-90's during Asia's emerging markets bubble. (See Figure 2)

Figure 2

Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our continually improved web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.

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Good investing all.