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Here is the Deal:

On ABC News last night they uttered the word I dare not speak. They called it “Stagflation.” Yuck! Just the mention of the word sends shivers up my spine, and I was too young to know what was really going on at the time. But “the powers that be” are not concerned with inflation, or so they said on the news. First, fix the economy by pumping lots of money into it. Then we worry about inflation. Not that it matters, but my father still expresses his disdain for Jimmy Carter, who once said in response to the question, “what are we going to do with 15% inflation?” -  “We might just have to live with it.” A while later, Mr. Volker decided that would not be the case. So, for the old guys out there, do you want to go through that again?

Don’t worry, be happy, gold and the HUI are blasting higher while the Dollar is getting crushed. More importantly, IBM is buying back more of their stock. IBM is responsible for 70 of the Dow’s 313 point gain of the past three trading days, and they don’t even insure loans. Momentum and short squeezes are in vogue, but for some reason I feel like the market is dancing with the devil. A great dancing partner, absolutely. But you don’t want to get caught with him on the dance floor when the music stops playing.

The Dow is snug as a bug with the Fib line at 12,710. 12,625 is looking a lot like “wave 4” type support and is expected to hold. We are going through a little “pause to refresh” as the market readies its self for a final thrust higher into the end of the month. The informative price action won’t take place until the Dow reaches the 12,900-13,000 area.

Here’s the Deal:

Since Friday’s rumor that ABK would be “saved” the Dow has jumped almost 600 points and the S&P 500 is up almost 60. I have to say, that is a pretty good move in just over two days of trading. Note: Today it was pointed out to me that current NYSE Short Interest is at a record level at 3.8% of total shares outstanding. No wonder it seems like the shorts are in a state of panic. There are lots of shorts to panic. Note: Historical comparisons should be tempered due to the advent of “short” ETF products, which likely have inflated the numbers since early 2006. But a record is a record and it is a lot to have to cover.

For the bulls, the close above the 76% retracement line at 12,600 is a huge positive. Whether it is short covering and or sustainable doesn’t really matter. Near-term the run and gun momentum crowd has the shorts on the run. While we should allow for a little backing and filling, as long as we don’t see a quick retreat, higher targets should be met.