The market action of the last few days reeks of short-covering more than anything else. I realize that rumors abound of more European bailouts (what is this… the 12th rumor?), Microsoft buying Yahoo! (an outright lie), and other items… but the reality is that the market is telling us plain and simple that this is just short-covering and a snapback.

For one thing, short interest today is at levels comparable to those of March 2009… when everyone thought the whole world would end. So there’s plenty of fodder for a sharp short-covering rally to occur.

We’re also seeing market action that indicates a short squeeze is on. Case in point, consider Tuesday’s action in which an unfounded rumor concerning yet another European bailout produced a 4.2% move in the S&P 500 in the span of 40 minutes:

The effect was even more pronounced in the Russell 2000. In that case the market moved over 6% in the span of 40 minutes:

That’s a 6% move… in less than one hour… based on another rumor pertaining to a European bailout (what is this… the 12th?). This is absolutely extraordinary and shows in no uncertain terms just how broken ad fragile the market is.

Indeed, the whole thing smells of 2008. Back then we saw rallies of 11%, 17%, even 20% too… how’d those work out? Did the market going up then mean that things were fixed and we had made a bottom?

Do not be fooled. This move is short-covering and a snapback and nothing else. We’ve seen several of these in the last two months alone. Every time the market rolled over quickly and collapsed.

So let the traders play their games. Based on retracement levels this move could go to 1,182 or 1,200 on the S&P 500. But this rally should be used to get even more defensive than before.

The reasons are clear: the European banking system is facing systemic failure. Bailouts will not solve this mess. The banks are all insolvent based on toxic debt exposure.

Meanwhile, the US economy is rolling over in a BIG way.  The ISM purchasers managers’ index, the Philly Fed index, payrolls, and the ECRI weekly leading index are all at or about to break into recessionary levels AGAIN.

Nearly half of Americans receive Government aid in some form or another. Food stamp usage is at a record high. The labor participation rate continues to fall.

And on and on.

In plain terms, the financial system is getting hit from all side. And the markets are setting up for a Crash on par with the 2008 collapse.

However, this time around we’re also going to be seeing major banks go under, market crashes, food shortages, government shutdowns, and SYSTEMIC FAILURE.

Yes, I believe that before this mess ends, the financial system as a whole will have collapsed. What’s coming is going to make 2008 look like a joke.

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Best Regards

Graham Summers