With the markets generally accepted as being overvalued and the economy widely accepted as being in the toilet, it’s hard to feel too bullish about price action going into the last week of the month.

What topics and themes are likely to emerge?  Let’s work backwards from next week.  Next week will end with the G20 meetings kicking off, unemployment rate / non-farm payroll, AND and FOMC statement…. not to mention some manufacturing numbers and some pending home sale data.  So, next week is a rocking news week in the financial markets.  We are about to commence “the week before next week.”  This week includes:

• Tuesday’s Consumer Confidence report
• Wednesday’s New Home Sales and Durable Goods Orders
• Also noteworthy on Wednesday is New Zealand’s rate statement

In term’s of the general market outlooks… my bias’ going into the start of the week are:

Favorite set-ups on the horizon:

• Very interested in an opportunity to short metals on the immediate horizon
• Possibility of a short Aussie near-term
• longer term horizon looking at a possibility to short some sugar next month
• An opportunity to buy some indices next month

General observation about markets, cycles, and timing:

As bleak as the current state of the economy and globe may be: as bad as housing may be, as bad as emerging markets may be, as bad as finance industry may be, and as bad as things may be for the US consumer, I would not be shocked if price bubbles continue to melt up significantly before they prices are annihilated again.  It’s well past time many traders expected prices to be heading south.  But, as markets tend to humble their participants, it would not surprise me if they have a few more surprises in store.  I’m just not seeing the technical signs in the market that things are too overdone.  But, the very first technical sign of systemic imbalance is in place: grossly correlated overvaluation across a broad set of asset classes.  But, that’s about it… some meltdown’s come unannounced, but, most don’t.  So, as always, precede with extreme caution.  Keep your powder dry.  Only fire when you must.  And, all the traders I have the pleasure of knowing good trading this week.

Take any book off the shelf and count the frequency of every word in the book. The most frequently used word will occur nearly twice as much as the next most frequently used work… which occurs nearly twice as much as the next and so forth. In mathematics, they refer to these as “power laws,” more specifically Zipf’s Law. But, I’m not selling mathematics. Back around the turn of the century I did data mining on web traffic. I observed that the most commonly visited site on the internet was visited approximately twice as frequently as the next most visited site. Not only does the pattern appear across sites, but also within sites. The home page to other pages…. albeit there are deviations to this, particularly for search engines. But, that very distinction helped us to automatically differentiate one type of site from another. But, this is a very important claim to get your mind around. It is all around you. The ramifications are huge.

Ben Bernanke is not responsible for the outcome of America. He has no bigger responsibility than the man selling the newspaper outside the grocery store. No offense. Our place is all different. But, we are in this together. The point I’m driving at is that the market correction has no more to do about mismanagement of businesses, banks or trading practices, or bad policy, etc… it has to do with fulfilling the law of the market: to screw the most people, most of the time. And, what just unfolded was simply that…

Take the largest population of money bearing individuals, the baby boomers, on the eve of their retirement… the exact moment when they want to take the most risk out of the system and you absolutely anhiliate every asset class: equities, bonds, housing, etc. What do you get… the justice of the market.

I watch the media rationalize market behavior every day. It’s by and large a crock of shit. I can picture some journalist, who has never sat behind a trading desk for a day in his life, scratching his head… thinking “how do I explain this one?”… “ahhh that’s it… bad earnings from GM…. moved the industrials 35 points.” Bullshit. That’s hindsight. The market moved because somebody got of his or her ass and had the guts to put their blood behind a subjective view on the world. Of the billions of market participants… and the gazillions of events that happen between all players every day… the odds of a journalist nailing it in a sentence are zero. The financial news is an afterthought… a tradition that once served a very different purpose in a very different time. Welcome back to reality.

But, this logic not only covers the past… but, the same principle can be extended to understand the future. When will the economy recover? That’s very simple. When it no longer matters to the baby boomers. Hope must be extinguished for the driving entity, at this time it’s the baby boomer. It doesn’t mean any form of mortal wound… just the dreams and expectations that were driving them irrationally exuberant. When there is no more place to them… a new game will begin again with the next largest generation, the tweeners that follow Generation Y. But, the new cycle will start in a new culture, a new language, encoded in fashions and products not understood by the last dominant generation. I hate to be the bearer of bad news but, the economic reign of the baby boomer generation is over.