this could happen any day now..

As I observed in Thursday's edition, we could be coming to the beginning of the end of the Bear Market. I believe there is still a lot of volatility ahead, but we could be close to an extended period of upside bias.

Bernanke's recent moves to create liquidity in the financial system have taken the market by surprise. The problem: financial institutions have no liquidity, which means they cannot finance transactions. They have no liquidity because their assets, which they can normally loan against, have little or bookable value at this time.

If the FED were to simply pump liquidity into the system by printing money, the dollar would continue to fall, oil and gold would continue to rise, and the world would be talking inflation. Rather than print money, the FED has rather brilliantly allowed these huge lending institutions to exchange their questionable mortgage portfolios for US Treasuries, thereby shoring up their balance sheets and putting them in position to get back into the transaction business. Net result: the dollar was up 2% this past week, oil and gold got killed, and the US Gov't is taking on some risk on behalf of the financial system. It's what the FED is supposed to do.

I believe this creative move took the market by surprise, and resulted in a strong rebound in the markets this week, and a perception the recession could be short lived.



This brings up the possibility of a potential "melt up" in the markets. Here's the situation- the markets are like San Diego County in the Fall. After the long, hot summer, the entire East County is blanketed with tinder dry brush. All it takes is a hot East wind, known as a Santa Ana, and a spark, to get all that fuel ignited and burning furiously.

The short interest in the stock market right now is like that fuel. It has never been bigger thanks to last summers rule change that allows shorting on any tick. In many public companies, the short interest is 60% to 80% of the entire public float.

So, who has these short positions? Who else- hedge fund managers. And, what is the month to month mantra for hedge fund managers? Don't lose money. Any kind of short term set back can effect their bonuses dramatically, and these guys generally don't have a long term perspective, particularly on a short position.

If the market starts to "melt up", these guys will be falling all over themselves to close out these trades while they are still in the money. It's what pros refer to as a "crowded" trade.

We're not ready to melt up quite yet. There will still be volatility. When we are, short covering will start in earnest, and then new long positions will make equities very crowded. I can't wait.

The roller coaster should keep going up and down, but we could be getting close to finally ending up higher than where we started. When the melt up comes, it's going to be a good one.