When told of the impending rally, I ran for cover

Everybody's asking; what's happening in these crazy markets. The majority seem to be calling for "a year-end rally" and are saying that we've seen the cycle bottom.

So, given my track record of calling three market bottoms precisely right (in 1982, 1987 and 2003) seventeen times, I will give you my take, which has been well summarized by a reader:

• Long term - bullish (14000)
• Intermediate term - bearish (9200)
• Short term - leaning bearish, but not surprised if markets continue up till year-end.

The latter would be confirmed by an S&P 500 index close above say 1210, which is just +1 pct off its present 1198.

It seems a shame that with interest rates rising, price inflation rising, and economic output trends slowing, there are so many fans ready to do the Wave for the benefit of the year-end bonuses of so few (Wall Street).

I say the common sense thing to do is to just let the markets seek a proper matching of PE multiples and interest rates needed to rebalance prices with the risks that exist today.

That means that the U.S. equity market ought to lead international markets down, because the risks are greater there, "yearning" and "pining" for lower multiples.

Serious traders know that PE multiples do not expand and interest rates do not fall in the face of rising inflation (for very long). I have repeatedly shown my readers the Haver Analytics charts on inflation to prove that inflation is rising.

But soon after the government reports and inflation data, the Talking Heads on Wall Street apply their own interpretation and spin. The public is told that an arrow pointing north is just a mirage; that it is really pointing south.

So when the market cheerleaders are telling you there is nothing to stop you from doing the Wave, I call that a shell game.

So how were the North American markets this week?

• U.S. Equities: S&P 500 up +1.6 pct to 1198, the Dow 30 up +1.8 pct, Nasdaq up +0.4 pct and Toronto up +1.4 pct, all Week over Week. Extreme volatility, but some technical indicators have now turned many traders bullish
• International Equities: Most international markets were up sharply by week's end (Tokyo up +2.7 pct, and London up +2.6 pct); technical indicators are turning bullish
• Bonds: Very weak; real estate market topping out
• Commodities: Pullback on Friday but still high, which means high raw material costs
• Oil & Gas: Prices will likely stay strong with winter's approach
• Gold: Moved to middle of $460 - $480 trading range; needs to close above $480.50 to move to higher trading range above $500; may test $460 first
• Goldminers: TSE Gold index (XGD) was strong, linked to gold bullion, (up +1.7 pct for XGD and +1.4 pct to $473 for Bullion W/W). Traders are buying the dips, and next week could be one that sees dips for this volatile group
• Forex: USD was weak on the week (down -0.8 pct), but strong on Friday (up +0.5 pct)

Is the public getting sucked in to the concept of a late-year rally? The truth is I don't know, but my answer is, I think so.

I'd like to ask how many of you have Dupont, Verizon, Merck, American Express or Caterpillar in your portfolios? These five stocks were up this week an average of +6.2 pct. If their performance had been removed from the Dow 30 index, you would have seen gains consistent with the Nasdaq (+0.37 pct) and Russell Small Cap (+0.41 pct) W/W.

But if the Dow 30 index was up just 41 points W/W would the Bulls be so smug as they were with their +173 point move on Friday?

I don't want to shock you here if you are one of the many who have fallen off the Cara Bearcub Wagon, but go through the Hourly data price charts for the ten U.S. equity sector ETF's for the last several weeks.

You are going to see just five short bursts of buying by Wall Street to suck you in. You'll see: (i) the afternoon of Wed Oct 19 (ii) the open on Fri Oct 21 (iii) the open on Mon Oct 24 (iv) the late-in-the-day rally on Tues Oct 25, and (v) and Fri Oct 28 at the open and again into the close.

For a couple weeks, the Bulls had control of the stage for a precious few hours.

Moreover, for the past week's Dow 5 Biggest Winners, look at the Dow 5 Biggest Losers list for the three prior weeks. Four of 5 of this week's winners VZ, MRK, AXP and CAT are each a big loser twice out of the three previous weeks.

That means short covering. That means the Dow rally was not being led by winners.

Does an army really want to be led into battle by a group of cripples?

So when you see VZ up +7.4 pct this week (govt approval of the MCI merger), think back to losses of -2.3 pct and -6.2 pct in two of past three weeks. And for MRK up +5.2 pct this week, look back at losses of -3.6 pct and -6.3 pct. How about AXP up +5.1 pct this week, but down -3.8 pct and -13.3 pct two and three weeks ago. Finally the +4.4 pct move in CAT this week, followed two weeks of -10.6 pct and -3.3 pct.

And for the other winner this week, Dupont, of course the price is going to look better if its oil-based raw material costs are dropping, but the company needs a U.S. economy to grow faster in 2006 than the +2.0 pct growth rate for GDP that many are projecting.

So, let's take this past week with a grain of salt. Don't get wrapped up in a short-covering exercise by nimble traders who know the power of Wall Street seeking year-end bonuses, using their pimp cheerleaders to whip the crowd into a Wave. Smart people take cover in threatening weather.

Now that those traders are flat in their positions, the market might rally here. But at the next sign of market weakness, the people I call the Master Traders will step back in with a new round of shorts.

And then the U.S. equity market is going south in a hurry, soon followed by the others.

It's hard to keep your seat while the crowd is enjoying the Wave. But it's better than losing your wallet.