Featured Trades: (HEDGE FUNDS RAMP UP MARKET SHORTS), (SPX), (SPY)

2) Hedge Funds Ramp Up Market Shorts. Hedge funds have gotten much more aggressive on the short side, as recent data show, with enviable results. According to Data Explorers, and independent research boutique, emboldened market timers and macro players increased their shorts in industrial stocks by 14.39% from July 31 to August 15, information technology by 12.65%, and materials by 10.09%. Industrials' share of total stock market capitalization fell by 1.11% during the same time frame, information technology dropped by 1.01%, and materials pared 1.11%.

This large scale selling, driven by an economic outlook that is fading fast, no doubt was a major contributor to the hellacious volatility we saw in August. Freshly sated, traders will no doubt come back to this well again, keeping volatility high. This is creating the enormous swings we are seeing in the market on an almost daily basis. The bad news for the rest of us is that hedge fund short positions are still only a tiny fraction of what we saw in 2008. There is plenty of dry powder to ramp them up much more from here.

I continue to believe that we will see some sort of 'RISK ON' rally in the Autumn, which might take us up 10%-20% from the August 8 low. There is at least a 50% chance that the bottom is in for this move, and that we rally from here, but in a highly choppy stop and start fashion. If I'm wrong, it will be by only a few dozen points into the 1,000 handle for the S&P 500 (SPX), (SPY). For the big crash, you are going to have to wait until next year.

What will be the driver for the next leg up? Corporations will once again deliver outstanding quarterly earnings for the season that begins at the end of September. The Fed will pour another gallon of gasoline on risk assets in some form, such as a 'twist' policy towards the debt markets. The esteemed government agency always seems to have some new tricks up its sleeve these days, so we may see some of those too. Finally, the bulked up shorts themselves will provide some ample tinder to get this fire going to the upside.

The longer term view, whether this rally lasts for weeks or months, is that this will be the last chance you have to unload equities before a much larger sell off in 2012. No matter how you cut it, the presidential election is not shaping up to be an equity friendly event, and it promises to drag out for another tortuous 14 months.

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Hedge Fund Traders Are Getting More Aggressive With Their Shorts

'Go where the growth is, and where the debt isn't, and that is emerging markets,' said David Donabedian, the chief investment officer of Atlantic Trust Co., the private wealth management arm of Invesco.

Featured Trades: (AUGUST NONFARM PAYROLL TORPEDOES MARKET RALLY)

2) August Nonfarm Payroll Torpedoes Market Rally. Economist and market strategists alike were stunned by the August nonfarm payroll report showing zero job growth. The headline unemployment rate stayed unchanged at 9.1%.

The reports for June and July were revised down a gut punching 58,000. Employers obviously reacted to the damage the Tea Party was threatening to inflict on the global economy with a Treasury bond default by instituting an immediate hiring freeze.

The figures were further muddled by conflicting cross currents. The Verizon strike cut 45,000 from the reported total. At the same time, a return of state employees to work in Minnesota, which had been shut down over a budget impasse, boosted the figures by 22,000.

Health care lost 30,000 workers, government 17,000, and construction 5000. Professional and business services gained 28,000 jobs. What is really frightening here is that only 4,700 temps were hired, which normally lead the recovery stage in the economic cycle.

Risk assets everywhere fled in terror, while a monster rally launched in the bond markets. Yields for the ten year Treasury bond reached a new intraday low in the mid 1.90%'s, while the 30 year was seen well below $3.50%.

For me, the real stunner in the report was the revision to July government job losses up to an amazing 71,000. Clearly what is happening here is that as short term government stimulus programs run out, public workers are being let go in record numbers.

Congress deadlocked and the House is ideologically handcuffed, so there is no chance that any of these job creating programs will be renewed. This is going to get a lot worse before it gets better.

Will this cause me to lower my 2% GDP forecast for 2011? I don't think so. But it will force some permabulls, paid cheerleaders, and Kool-Aide drinkers to revise down their own overoptimistic targets from 4% and 3% down to my own more realistic and greatly subdued figure. Hint: This is not good for stock prices.

What organizations are currently advertising the greatest number of job openings? The US Air Force, at 134,000, followed by Taco Bell, the National Guard, and Staples. Looks like you better sharpen up your target practice or your Spanish if you want that paycheck bad enough.

Oops. There Goes the Economy

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I Think I Have a Job in My Sights

Featured Trades: (CONSUMERS ARE TELLING 'PORKY PIES')

2) Consumers are Telling Porky Pies. When I was working on the trading desk at the London office of Morgan Stanley I became familiar with the particular argot they speak in the East End, otherwise known as 'cockney'. A form a slang originally developed to keep bobbies guessing their true intentions, cockney can be as puzzling to outsiders a Greek hieroglyphics. Just in case you did not grow up in Spitalfields, Whitechapel, or heaven forbid, Bethnal Green, I'll give you a hint about the true meaning of 'porky pies,' that it rhymes with 'lies.'

The porky pies I am talking about are the ones consumers have been telling pollster's about their sentiment towards the economy. They have been informing both private and government opinion collectors that they are worried about the future, they are defensive in their investments, at that their spending plans are modest at best. It seems that all they want to buy are bonds.

Yet, almost every economic data point we have received over the past month has shown a modestly improving economy growing at a rate of around 2%. Only just this morning, July factory orders came in at a healthy 2.4%, against only 0.4% in June. Apparently consumers are telling anyone who asks that they hate their future, and then run out and buy a new car, a refrigerator, or a big screen TV.

I spoke to several local car dealers yesterday. To a man they told me that sales were good, now that the 2012 models are out. Only the hybrid Chevy Volt has been a complete disaster. After 40 years in the business, I have learned that when facts conflict with opinion, go with the facts every time.

This is not the first time that the public has told fibs to opinion gatherers. You often see it in politics, where individuals express their deep concern over the budget deficit and the national debt, but won't reveal a single spending program they are willing to cut them.

What this means is that the economy is better shape than the markets are currently discounting. They have discounted a recession that isn't going to happen, and that the surprise move in risk assets this fall will be to the upside. The double dip is nothing more than a great way to eat ice cream.

I think that the carnage we witnessed in August was a onetime only panic induced by the Tea Party's engineered near default on Treasury bonds. As that event passes into the rear view mirror, and investors look at how far prices have fallen, we might see a flood of money that pours into risk assets everywhere.

Nothing More Than a Fantasy?