Are we reaching a bearish extreme - an extreme that actually allows the markets to lift? The news flow continues to be extremely depressing. It always is this way when prices have depreciated greatly and fear is in the air. Bill Gross says that the Fed can't solve our problems with artificially lowered rates again; that it will take a public works program of sufficient size ... like the 1930's. It's a thought provoking read.

A New York Times article indicates that at a meeting of global finance members, the expectations is that sub-prime write downs are easily going to reach $400B before it's over. Our back of the envelope numbers were for $700B a few months back. Still think that number is more real. Regardless, with short term rates being brought lower and longer term rates remaining sticky, the banks are quickly repairing their balance sheets by making the difference on the spread.

Our nemesis; inflation is on the move and starting to get more serious press.

The list goes on and on. What's interesting is that the sentiment numbers are starting to scroll off the map as we are registering a +80 on the bearish extreme readings now. Might not be the best time to load up on the long side, but these kinds of reading surely suggest that if you are pressing short, you are pressing so dangerously. The Investors Intelligence readings show the same story.

On the flip side, our own market internals that we track are showing a more mixed picture with the shorter term indicators showing that we could still track lower a while longer but the longer term indicators showing that we are likely bottoming down in this area. We also show positive divergences developing on the high/low lists.

All of this leads us to lean long for a porcupine spike that is likely developing. This morning we see the futures have recovered from overnight weakness. Most of Asia was closed for the holidays but what was open closed lower mostly. Europe to is lower but not smartly so. The dollar is weaker as the inflation numbers out of Europe has the traders betting against further easing in rates across the pond. Bonds are flat to start the day as is oil but the metals complex have worked higher on the weaker dollar. Grains are mixed with wheat continuing its meteoric rise but other grains taking a breather.

The indicators we watch suggest a rally to begin to develop somewhere in this area of price points. The timing will likely be difficult to nail but somewhere over this week or next we would expect. Keeping some chips on the long side of the table continues to make sense. Don't expect volatility to disappear as that continues to be the story in the markets. Work it to your advantage with partial buys and sells at daily extremes.