The S&Ps look poised to surge at Tuesday’s close even though they had spent most of the day merely treading water. I’ve sketched out a rally pattern in today’s E-mini tout that projects a move that would be equivalent to about 100 Dow points. If this happens and Apple leads the charge, it could provide an excellent opportunity to take some profits on a butterfly spread that we pegged to a 660.26 rally target. The stock closed on Tuesday at 638.00, up more than $9 on the day.

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Ominous Sign as Each New Rally Disappoints

[This commentary has drawn strong interest from the Twitter crowd, so I’m letting it ride. RA]

To hold a long position in a hot stock, as we currently do in AAPL, is to become increasingly aware that each new rally has been little more than a tease, never quite living up to the patient bull’s hopes. Looking at the stock market as a whole, recent rallies have pushed marginally into record territory, only to recede so swiftly as to cast serious doubt on the bull market’s health.  My very strong feeling, verging on certitude, is that the stock market is making a broad top — setting the hook, as it were, for bulls. If I had to cite just one piece of evidence to make the case, it would be the screaming divergence between Treasury debt and stocks.  With a rally that has been as unexpected as it has been powerful, T-Bond futures are acting as though the U.S. economy is about to slip back into deep recession. Stocks, on the other hand, are trading near record highs, cheered on by the likes of the Wall Street Journal and Forbes despite mounting evidence that The Great Recession is not only still with us, but about to turn killer once again.

Economy’s Liftoff Worse than Delayed

The most telling headline over the weekend came from the Journal:  “Weak Wages Pose Threat to Liftoff.” The wording of this headline is more coy than is first apparent. It is one thing to report that the economy remains weak because wage growth has been non-existent. But to say that an economic liftoff is “threatened” is to imply that the liftoff itself was already in progress, or imminently so. We would argue otherwise, noting that it is not merely weak wage growth that has kept the economy down, but a dozen other factors, most noticeably the alleged recovery’s failure to lift America’s middle class from the prop wash of The Great Financial Crash.  Sure, they are still able to buy cars for nothing down and zero interest, and there are more Escalades than you can count sitting in the driveways of run-down neighborhoods. Indeed, it’s less painful to buy a $40,000 automobile nowadays than to ring up a fully loaded cart of groceries. Meanwhile, despite low mortgage rates, the second shoe is about to drop for the housing market. That’s because prices are high and qualified first-time buyers nowhere to be found.  A huge glut of new apartments in the pipeline will be a big factor in the coming bust.

If the foregoing is correct, the rally in Treasury bonds and notes is just warming up. That means long-term strips, for one, are where investors should put their money right now, not stocks.  When investors panic out of shares sometime in the next few months if not sooner, that’s where all the money will go. This is effectively a short position against junk paper, by the way — an insight for which I thank Doug Behnfield, a financial adviser who is not only a friend, but also the smartest investor I know.  It seems entirely predictable that the mountain of capital now diving desperately into high-yield bonds and Wall Street carny scams such as “liquid alternative funds” is about to reap its just rewards.