The week ended on a felicitous note, since we’d shorted some S&P mini-futures Friday on the exact high of the day, 1398.25.  The advice that went out to subscribers the night before, with the S&Ps trading 26 points lower, was as follows:  “If there's a reason to go with the flow right now -- to follow the lunatics right to the edge of the cliff, if need be -- it is the clarity and persuasiveness of the bullish pattern shown in the accompanying chart. The hourly bars yield some of the most reliable targets we've seen in this vehicle, and it looks like another doozey is on its way. The actual pivot lies at 1398.25.”

And so it went. The position was showing an unrealized gain of $550 per contract at the final bell, but we’ve learned not to count those chickens before they hatch, since what Mr. Market giveth, Mr. Market might rescind before we’ve had our first cup of coffee Monday morning. Even though we were prepared for the S&P futures to top exactly where they did, Friday’s tidal surge came as surprise, triggered as it was by the announcement that Citi had lost yet another $5 billion in the first quarter. Had we known that such rotten news would greet investors on Friday, we probably would have gone home short the night before. But we would have been dead wrong, and we would have been sporting a brand new orifice before the session was even an hour old. Who knew? For, far from being alarmed by the news, Wall Street took it as reason for celebration.

(Click on chart to enlarge)

 We’ve explained here a dozen times that these rallies have just one cause: short covering. Seen in that light, Friday’s surge occurred simply because sellers, having anticipated the worst, had done all their selling before Friday, leaving “no one” to weigh down shares when the bad news came. This is most surely what happened, but here’s the conventional take on the rally, from the Wall Street Journal’s market wrap-up: “Analysts say investors are increasingly betting that the worst revelations of credit-related losses are nearing an end on Wall Street… In the eyes of many investors, the months-long process of effectively factoring big losses into financial firms' share prices has left little reason to continue selling after the announcements of those losses.”

Libor Scandal

If so, the investors who have been doing the betting apparently haven’t been following the news, since there’s a Libor scandal brewing that could decimate some of the biggest banks in the world (other than Citi, of course) and make the corruption that brought down Enron look like an April Fool’s prank in comparison. It now appears that the heads of Euroland’s biggest banks – Sollozzo, Corleone, Tattaglia, Cuneo and Barzini? – conspired to underreport interbank borrowing activity so as to significantly understate the grave  liquidity problems that have beset those banks lately.  This helped suppressed Libor rates, which are the most widely used interest rates in the world, while masking the desperation of the banks doing the borrowing.  However, it has not ameliorated the underlying problem, and news of the scandal caused the London interbank rate to leap as the week drew to a close, hitting borrowers with countless billions in new costs.

Higher Targets

In sharp contrast to bulls, we think the “banking mess” is still in its early stages and that many very large banks will fail before it has run its course. That doesn’t mean U.S. stocks can’t go higher in the meantime, borne aloft by a volatile combination of panicky short-covering and breathtaking stupidity. Indeed, although we ended the week short the S&Ps, we have disseminated a bullish target for next week that leaves plenty of room to rally. We’ll plan on covering our short position on favorable terms Monday, then to rejoin the revelers until the next short-able target is reached.

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Hidden Pivot Seminar May 21-22

Because seats for the recent Hidden Pivot seminar were nearly sold out, I’ll be offering the course again in May – on May 21-22, from 6 p.m. to 9 p.m. Mountain Time.   Click here, and then on the “Upcoming” tab to register;  or here if you would like more information as well as a detailed description of the Hidden Pivot Method and a free Hidden Pivot calculator.  You can also get a free one-day pass to the Rick’s Picks chat room by clicking here, and then on the green banner.