On Friday we have had a relief rally and a lot of investors with long positions are excited. However, in this period of extremely high volatility the chance for a head fake still remains. That’s why it’s better to validate a real rally than anticipate it. Very high volatility is creating intra-day swings that can take out even some of the deepest stops.

Covering short positions is exactly what causes a short-covering rally such as last Friday. It usually takes more than just a little offset to encourage short sellers to exit their positions. When short-sellers begin to cover as a group, they could cause a massive bid in the market and a rally to ensue. In many ways, that is exactly what our current market environment is set up for.

Keep in mind that the underlying economy is weak, corporate earnings are not likely to be good, global growth rates are horrible, and there is a liquidity crisis in terms of new money coming into the market. These problems are not going to go away, but the market has been definitely been beaten down recently. Therefore it’s ripe for a short-covering rally as you witnessed last Friday.

This bull is getting very tired, and late term bull trends have the following characteristics in common: higher volatility spikes, higher volatility lows, and most importantly, “lower highs” on the indices. Those things all happen just ahead of the bull’s last gasp. But there is still something substantial missing from the picture – higher interest rates.

Normally, bull markets don’t end until the Fed really cranks up the interest rate high enough that investors are pulled away from the equity markets and into Treasuries, seeking safety from volatility as well as, the enticement of semi-reasonable returns. But with rates still at historic lows, that’s not an issue right now and, it’s the only reason we haven’t turned quite bearish yet.

This following article is interesting observation of the high-yield bonds: Junk-bond market sends up latest signal of distress

Our positions are all in Cash