Week of 1/3

U.S. Equities (and world equities) will likely go up for around for 1 -3 weeks in a sharp up move.

The EURO-USD pair could be bullish for 1 week or so. But if this move is for real, it should not go up beyond 145.5 or so. If it does, I will wrap up my shorts at favorable opportunities.

My primary case for a top in equities:

1. Equities are fundamentally overvalued - by any measure, even if earnings are as golden as expected. Earnings will be good for 2010Q1 and possibly also for 2010Q2. But 2010Q3 and Q4 may not be golden. Fear of that should draw the markets down.

2. Fed may be done buying bonds -- QE. If Fed stops buying bonds, bonds collapse, as they have been. LT interest rates go up (they have been). Equities may continue up (1-2 weeks). This is what has been happening. Bonds (20 year - TLT) will continue to fall to $87 or so, where they meet a rising trend line and bounce. Why do they bounce? Because of a global flight to safety, a flight away from risky high-yield Brazilian bonds to safe U.S. Bonds.

3. Fund managers have collected bonuses for the stellar 2009.

4. We have finished a 10 year Bear Market. Buy the next dip. We should overshoot to the downside, and therefore SPX 850 is a good bet. 900-950 is fair value.

5. Sentiment among fund managers is overwhelmingly bullish. However, sentiment among the public is still overwhelmingly negative. The China-India growth story is intact, but should suffer a correction. We should get a correction; this is a healthy bullish scenario. We should get a correction so that bears feel we are going down to the end of the world -- they were right all along. 10% from 1150 means 1040 or so. 20% means 920 or so. This should be expected. I may start buying 920.

6. A stock market correction will also bring about lower interest rates, which is also long-run bullish because it will help with mortgage resets.

7. Catalyst may be fear of government intervention being withdrawn, or sovereign default in Europe. Ireland? Greece? We are overvalued; all we need is a catalyst to produce a low and then a lower high. Then we're set. Low around mid Feb? Lower high late Feb? Then decline?

8. Summary: I am bullish in the very short-term (1-3 weeks), then bearish for 3-6 months, and Bullish LT. The upcoming correction is a buying opportunity LT.