Todd Harrison: "We Are in the Eye of the Storm"

As with other pundits, most notably George Soros, Harrison says the subprime implosion of 2007-08 was merely "phase one" of the crisis. Since then, "historic efforts" by global policymakers temporarily revived the financial markets but didn't cure the underlying problems, he says.

Rather than providing "medicine that cures the financial disease" - debt destruction or restructuring and asset deflation - policymakers keep pushing "drugs that mask the symptoms," Harrison warns.

Citing the "cumulative imbalances" in the financial system (key word: "cumulative") and interconnectedness of the global economy, Harrison says the big question is: "How long can this continue before we're allowed to take free market medicine?"

Given the "big picture concerns" cited above and detailed here, Harrison is still (still!) holding 100% cash in his long-term account, something he first discussed here two years ago.

The Long & the Short of It

While certain of the eventuality, the former hedge fund trader admits "I haven't wrapped my head fully around timing of the second phase of the coming storm."

In the meantime, Harrison is "going to let the tape tell me how to trade" and is watching the following keys for near-term guidance:

Home on the range: The S&P 500 has a "well-defined floor" of 1040 and began Thursday with a chance to break through near-term resistance at 1115, he says. A solid breakout above that level could push the index "all the way up" to 1150.

Banks on the Brink: Since "everyone" is watching S&P 1115, Harrison is looking for other technical indicators, citing 50 on the KBW Bank Index as an important test for the sector, which remains a barometer for the boarder market.

Movers & Shakers: Harrison says the prettiest "lipstick on the pig" lately has been the Dow Transports, which broke their downtrend from the April highs earlier this week and then held up well yesterday in the face of FedEx's warning.

Asked to predict how the market will fare in the short term, Harrison cited the looming end of the quarter and Friday's options expiration as two important dynamics to watch.

"There's a lot of reactive fund managers [who will] ‘sell lower and buy higher,'" he says. "We could see a lot of self-fulfilling prophecies between now and July 1."