Blog Posts by Matt Nesto

It's the first three-day rally for stocks since July 1st. And it's the best three-day percentage gain since the S&P 500 popped 11% in a small stretch that brought the market off the March 2009 lows.

While it may feel nice to have a summer relief rally, you'd better love it while it lasts because traders like Peter Kenny of Knight Capital say this will be gone before you know it. "This is only a tradable bounce for those who have got a very strong stomach," Kenny says from his firm's trading floor across the Hudson River in Jersey City, NJ. What's worse is that he thinks we're at the top of the range (for this year at least), and that we could see another 15-20% downside from here.

In the short-term, Kenny says we've had a change of focus with the "reintroduction of the M&A theme" today, courtesy of Google's (GOOG) $12.5 billion deal for Motorola Mobility (MMI) which some say is designed to mimic Apple (AAPL). While the longevity of these bounces will be largely dependent on economic data this week, "you still have to trade these bottoms," says Kenny.

The M&A pop "has given the market the opportunity to shift that myopic focus away from the Eurozone, which may not last that long, and away from the US debt ceiling and government spending," Kenny says before returning to his overall bearish thesis. "This is the life support for a market that's in a downward trend."

If he hadn't been so right when we last spoke with him in June, I might have been able to dismiss Jay Feuerstein's latest projections with a, "yeah, right, whatever." But he wasn't just right on the Dow back then; he nailed it on oil too, correctly predicting both were headed sharply lower in an interview June 15, 2011, specifically, to 10,000 and $60 respectively, from 12,000 and $95 at the time.

And so, two months later, has this prescient bear changed his tune?

Not one bit.

"I am definitely still short stocks," says Feuerstein, the CEO and CIO of 2100 Xenon, a Chicago-based managed futures firm. "I don't think anything has changed. I think the Dow could go down to 8,200, 8,300."

While forecasting a further 25% decline in a market that's already just instantly shed 15% is certainly bold, his rationale is not.

Lack of liquidity. Global uncertainty. Budget cuts. Lack of stimulus. High chance of recession. But add it all together and Feuerstein says, "I just feel overall demand shifts

Question: what index is up 65% so far this month at a time when stocks have shed 15%-20%?

Answer: The VIX, also known as the CBOE Volatility Index.

I don't know about you, but anytime I see a parabolic move like that, I can't help thinking, ''There's no way this can last." But to actually man-up (sorry ladies, just a figure of speech) and short it here, well, that takes actual guts. Or "conviction," as Harry Rady of Rady Asset Management says.

"It is by far our largest position," the self-described "deep value, tactical contrarian" says in talking about being short the VIX. "Given how wild the swings are and how significant they are, it creates real opportunity and creates real inefficiencies," he says.

While Rady concedes that the VIX could still push higher from here, over the coming months he believes that volatility will compress, as it has "95% of the time."

If you like that call, try this one on for size: "I am short gold." I'll let him explain.

"That's more of a short-term

Fans of the New York Mets are all too familiar with the slogan "Ya gotta believe." No matter how long the odds, or how dire a situation appears, the thinking goes that if you keep the faith an amazing win is always possible.

Today it's a big win for the bulls as stocks came roaring back. The Dow Jones Industrial Average rose 3.9% to 11,143, the S&P 500 rose 4.6% to 1,173, and the Nasdaq rose 4.7% to 2,493.

Despite the huge gains, investors are at tipping point, facing a major test of confidence on whether they believe in today's rally or not.  Money manager Harry Rady tells Breakout he's not buying this rally and "things could get worse...a lot worse. As we saw in 2008 things can go a lot lower then people expect."

How much lower?

"Down 40% wouldn't be unexpected," Rady says, explaining that the market might even have to overshoot that mark to truly draw investors back in. "In 2008 and 2009 I believe we lost a whole generation of investors, and those that we didn't lose, just got slaughtered again. So I think it's go to be tough sledding ahead."

For a man who says to "expect the unexpected" it may seem logical that he has no faith whatsoever that government leaders at home and abroad will be able to fix a mess of their own making. "It's terrifying that we have to rely on the Europeans getting it right," Rady says. And he's also not willing to rely on our own politicians getting it right and resolving our near-term slowing economy and long-term deficit growth.

While our clearly oversold markets are catching a bounce off the better-than-expected jobless claims, nothing material has changed to truly give us confidence that this crisis is contained or discounted, let alone over.

We are at the two-week mark in the current stock slump and now more than ever, the leadership void is obvious. Earlier today, investor eyes turned to Europe, where there's now talk of a futile and misguided attempt to regain control by banning short sales. Not only would it not work, it suggests to me that panic has spread to European leaders.

In Europe, fear and contagion are roiling their banks and markets, even as the European Central Bank or "ECB" spends billions of other people's dollars buying Italian and Spanish bonds in a bid to stabilize them. As Macke says, "banking contagion" may sound heady and wonkish, but it's not that complicated given how intermingled our global financial system is. The situation is in Europe is no less muted today with talks of short sales and French President Nicolas Sarkozy pausing his August vacation.

Add in the reality of a U.S. recession, whether it is here already, on the way, or ends up being narrowly averted, the global economy will be weak for at least another two-years. In my view, this was confirmed by our Fed Chief Ben Bernanke on Tuesday.

The leadership vacuum here and abroad is both absolute and astounding. "President Obama is fundraising in New York today as the rest of us are losing funds," Macke quips. This hobnobbing comes just a week ahead of the President's scheduled 10-day vacation on Martha's Vineyard.

So what's the bottom line? Trust and confidence are still absent in today's financial markets.

"The decision to abandon ship is usually very difficult. In some instances, people have perished in their life raft while their abandoned vessel managed to stay afloat. Other cases indicate that people waited too long to successfully get clear of a floundering boat." - Procedure For Abandoning Ship from BoatSafe.com

The quote above is about nautical safety, but the parallels with the present situation in the stock market are abundant and clear.

While all stocks have been hammered by this current storm, no corner of the market has been slammed harder than the small caps. As of this morning, the Russell 2000 (^RUT) is down more than 20% in the past month versus about a 15% drop for the S&P 500.

To most investors, the 20% drop on the Russell is enough to characterize the small cap crash as a "Bear Market." However, veteran investor Ford Draper of Kalmar Investments believes the current turmoil must be more prolonged and agonizing to earn that dubious distinction. Instead, he sees this as an opportunity to trade up into companies he thinks have been ''unfairly crushed", to increase holdings where they have "great conviction", and to sell positions where they don't.

"What I would say is don't abandon small caps. There are too many good individual opportunities there," Kalmar says. "Just make sure you don't have a high-risk for high-reward manager, but rather a low-risk for high-reward."

Of course that's easy to say when you have a long-term track record of outperformance, a 4-star rating and a zen-like turnover ratio of just 29%. It also allows him to keep a straight face when using terms like "low risk" and "conservative" to describe their style even as he holds numerous stocks that have 20% short-term losses.

Here's how he justifies it:

This is just crazy. Where is Johnny Nash when we need him most to belt out his classic hit I Can See Clearly Now? Because really, these markets are seeing nothing but obstacles right now and the thought of a bright sun shiny day for the markets seems like a distant memory.

"We don't have clarity," says Chicago-based bond trader Jeff Kilburg, the Sr. Development Director of Treasurycurve.com. "The market wants clarity and they want it now."

On the one hand, Kilburg says we have been given an unprecedented degree of clarity from the Fed in terms of its new low rate forecast for the next two years, but on the other hand is the harsh economic reality that outlook portends, as well as the Fed's inability to do anything about it. "It's not 2008. Ben Bernanke is not rolling down the street in that tactical hummer with every weapon in his aresenal. He's more or less rolling in a mini van right now," Kilburg quips.

With nearly 15 years of experience trading Treasuries, Kilburg is now more than ever looking to the bond market for leadership and to relinquish all notions on falling yields. "We had this exact conversation when the 10-year treasury came down to 3%. Now we just went down to 2%. Rewind back to April and the 10-year was at 3.75%," he points out.

So are Treasuries are telling us we're in a recession?

"I think we are, no doubt about it," says this former Notre Dame football player. "You can call it whatever you want... but I think we are actually bottoming out in the Treasury market...but I think we are going to see continued chaos...and I'm just hoping we get through this quickly."

As the flight to quality, high yielding multi-nationals becomes increasingly crowded, here's something different that the market pundits aren't telling you: Small caps and risk assets will outperform on the way up.

"Historically, that has always been the case and I think it should be no different this time. The valuations are compelling," says Candace Weir, the founder and CIO of Paradigm Capital.  While the Federal Reserve's updated outlook is tantamount to a two-year punt, Weir and her daughter/partner Amelia are already operating under expectations for anemic recovery and buying companies that will do well despite the economy.

With a 40-year track record, this is obviously not Candace's first rodeo. It's also why she believes that it is important for her firm to "stick with what you know" and continue to pursue ''inefficiencies" that have allowed them to consistently outperform the Russell 2000 (^RUT).

"It's not so much about whether or not we have a recession or what actual GDP growth is, but rather, finding the companies that can persevere and really deliver that top and bottom line growth, regardless of the economy we're in."

The same cannot be said for the market environment we're in, however, which Weir describes as "irrational." By hand picking a portfolio of 80 to 90 small cap stocks, this mother-daughter duo is able to have personal contact with the companies they own. On a bad day, like we've seen lately, Candace says it's not unusual to speak with a dozen CFOs per day.