MOUSE IN A MAZE

I think we would all agree that gold is and has been in a secular bull market for the last 10 years.

Even if it took you three years to recognize the bull and you bought at the very top of the third C-wave a simple buy and hold strategy would have you up over 200%.

Now here is the challenge. Look at your portfolio since 04, and be honest with yourself. Has your investing strategy produced at least a 200% gain in that period? Have you even made money in that period? Have you consistently lost money?

If you haven't made any money and have just been spinning your wheels, or even worse you've lost money (I suspect over 90% of retail traders are going to be in this category) Then ask yourself why do you continue doing something that time has proven not to work? Do you think the market is all of a sudden going to change and your flawed strategy is going to finally start producing big profits?

BTW of the 10% (I'm being generous) that have made money virtually none of them have even come close to 200%. Because traders absolutely must control risk and that necessarily means small positions size, anyone doing 15-20% a year is an exceptional trader. And it takes a 20% return for 6 years in a row to increase ones portfolio by 200% in 6 years.

That means one would have had to ride the entire bull, correctly spotted the bear market, correctly navigated one of the most volatile periods in stock market history and again spotted the end of the bear and rode the cyclical bull. That's asking a lot from anyone to spot and trade through all those different market conditions successfully. I can guarantee there were very very few people who did.

There are several reasons why people choose a trading strategy. First and foremost, although very few people will even admit it to themselves, the vast majority of retail traders are motivated by a gambling addiction. All in all not a very healthy way to make money.

Second, most traders are deathly afraid of draw downs.  They simply can not stand to see their account decline. Even if they rationally understand that their position is a winning position (as virtually all precious metal positions are at this time) they still require the market to do what they want when they want. If it doesn't adhere to their time schedule they are willing to take a loss instead of holding their position until the market decides to come around.

Third, most traders are under the delusion that they can in fact correctly navigate the future and in so doing immensely increase their profit above and beyond a simple buy and hold strategy. (I think most of you, if you  honestly accessed your success or failure over the last 6 years have by now come to the conclusion that the dream of vastly superior returns by trading is a chimera that will never materialize.)

So why do we continue to do something that doesn't work, over and over again?

Many traders are like the proverbial mouse in a maze who keeps running down the same path again an again never getting the prize.

Every once in a while though a mouse will come along who breaks the pattern and chooses a different path. That's the mouse that gets the cheese. 

If what you have been doing hasn't been working, then maybe its time to look for the cheese  down a different path.

TGIF: Trading Expected To Be Light Ahead of Holiday Weekend

The market help up very nicely yesterday, and even built on its gains right into the close. Regardless, it has been a very rough month for the stock market, and traders are likely happy to shut it down early today and get a start on the long holiday weekend.

There were no big headlines this morning out of Europe, which is nice. There were some economic releases here in the States. To wit, personal income rose +0.4% (in-line), while personal spending was flat, coming in below estimates. The savings rate jumped from 3.1% to 3.6%, as it appears consumers reigned in their spending.

While this is good for those individuals, who may be repairing their personal balance sheets, it doesn't help the economic rebound, which seems to be losing speed of late. The ECRI weekly index has been hinting at this slowdown for a while, and it looks like it is materializing now.

Asian markets rose nicely overnight, and Europe is positive this morning; the 10-year yield is flattish around 3.33%; and the VIX is below the 30 level for a second day.

Trading comment: Yesterday was a nice rally, and we used the strength to do a little selling. At this point, while the market could continue to bounce, it looks like the leadership in the market is narrowing. So my strategy will be to focus on those stocks that continue to lead the market, and pare back those positions that look like they are beginning to struggle.

The S&P 500 is sitting right below its 200-day moving average (see below), which as I have said should act as resistance on the first push higher. I would expect the market to pullback a bit from here, but then to successfully push through resistance. That is the bullish scenario for an oversold market coupled with highly bearish sentiment.

But if this market truly is not ready to rally, we will know it by the inability to recapture this key moving average. In the meantime, enjoy the long weekend--

On Tonight's Kudlow Report

Tonight at 7pm ET:

IS BP’s “TOP KILL” WORKING?
NBC’s Jay Gray reports.




BP: OBAMA'S PRESS CONFERENCE; & ANGER FROM THE HILL
CNBC chief Washington correspondent John Harwood reports.

BP DISASTER … PLUS, IS BP TRADING WITH THE ENEMY?

- Jed Babbin, former deputy undersecretary of defense for Bush 41
- Chris Holton, Center for Security Policy Vice President
- Rory Cooper, Director of Strategic Communications at The Heritage Foundation , Senior Policy Adviser in the Bush Energy Department
- Rep. Trent Franks, (R) Arizona (4th Term)

IS THE GULF OIL SPILL OBAMA'S KATRINA?
- David Goodfriend, Fmr. Clinton W.H. Official , "Left Jab" Co-Host/Air America Co-Founder
- Dan Mitchell, CATO senior fellow

RALLY! MARKET'S SOAR… IS THIS THE BOTTOM?

--MARKETS CHEER CHINA BACKING BAD DEBT IN EUROPE - ARE THEY AS DUMB AS THE REST OF US?
--GEITHNER GIVING EUROPE ADVICE ON PUTTING THEIR FISCAL HOUSE IN ORDER....HUH?
--IS THIS AUGUST 2007 IN TERMS OF CREDIT SPREADS?
CARRIED INTEREST TAX ON INVESTMENT - WILL IT KILL ENTREPRENEURIAL INVESTMENT GROWTH & CAPITAL?

- Dan Fitzpatrick, StockMarketMentor.com, President & CEO; Senior Contributor, RealMoney.com
- Michael Cuggino, Permanent Portfolio Family of Funds President & Portfolio Manager, Permanent Portfolio Fund (PRPFX)
- Steve Moore, Senior Economics Writer for the Wall Street Journal Editorial Board; "Return to Prosperity" co-author
- CNBC’s Rick Santelli

Please join us. The Kudlow Report. 7pm ET. CNBC.

Greek Disease in the House

One day Team Obama announces a plan for enhanced rescission authority to impound wasteful spending, and the next day the House surfaces a plan for $200 billion in “stimulus” spending on transfer payments for welfare, even more unemployment compensation, still more Medicaid, and a bunch of special-interest subsidies.

So are we to believe that Obama will rescind the excess appropriations? Hardly. And since pay-go is dead, most of this new spending will not be offset. It will add to deficits and debt.

It’s the Greek disease. The welfare state run amok. Right here at home.

And in true class-warfare style, a small portion of the $200 billion is supposed to be offset by jacking up capital-gains taxes for investment partnerships. If passed, this would reduce investment, jobs, and economic growth, and enlarge the deficit. Higher spending and investment taxing is a true austerity trap.

This business of raising the tax rate on investment partnerships would be a particularly onerous burden on American entrepreneurs. And it would put this country at a decided disadvantage to our competitors in China and elsewhere in Asia (outside of Japan).

Increasing the tax rate on the investment portion of these partnerships (i.e., the capital gains) would boost the penalty rate from 15 percent to 38 percent -- and that includes the Obamacare payroll tax on investment scheduled for 2013.

So, instead of keeping 85 cents on the extra dollar earned from high-risk investment, the House proposal would drop the return to only 62 cents -- a whopping 27 percent incentive rollback. And by the same amount, it would raise the cost of new capital, draining investment liquidity from the private sector in order to finance government transfer payments.

Nothing could be worse. This is spread-the-wealth in its most crass form.

And if all that weren’t bad enough, the House proposal would tax the so-called enterprise value of these firms by applying the same penalty-rate structure on the sale of all or part of an investment partnership. In other words, it would make real-estate, venture-capital, and private-equity firms the only businesses in the country that are ineligible for long-term capital-gains treatment when they are sold in full or part.

One private-equity partner tells me that this would “tear apart the incentives for innovation that have been at the foundation of American enterprise since 1921, when the capital-gains differential vis-à-vis ordinary personal tax rates was first created.”

Compounding matters, we read in USA Today this week that private-sector personal incomes are at an all-time low, while government benefits as a share of income stand at an all-time high. I believe this is called redistribution.

And then comes a study from the Harvard Business School that states: “Stimulus Surprise: Companies Retrench When Government Spends.” What a shocker. (Hat tip to economist Don Luskin.)

House Democrats apparently don’t read newspapers from Greece or the United States. And they sure don’t read Harvard B-School studies.

"The Larry Kudlow Radio Show" Is Now Nationally Syndicated

Citadel Media announced the addition of The Larry Kudlow Show to its News Talk portfolio. Hosted by respected economist and CNBC anchor Larry Kudlow, the show launched on 77 WABC in 2006. It will be available in national syndication on weekends beginning 6/5.

“Larry Kudlow’s insightful opinions on money, politics and the economy are rooted in his understanding of the way Wall Street, Main Street and Washington operate,” said Carl Anderson, Senior Vice President of Programming and Distribution for Citadel Media. “His expertise will be an instant hit with our affiliates and offer their listeners a compelling perspective on the week’s financial news and events. This is a tremendous addition for our growing News Talk lineup.”

Kudlow served in President Ronald Reagan’s administration as Associate Director for Economics and Planning in the Office of Management and Budget. He is a nationally syndicated columnist, noted author and serves as an editor for National Review. He hosts The Kudlow Report each weeknight at 7 p.m. ET on CNBC and also co-hosts The Call for the television network, which airs weekday mornings at 11 a.m. ET.

“I’m looking forward to bringing our weekly program to a national radio audience and sharing my thoughts on the political factors shaping the current state of our economy with new listeners,” said Kudlow. “Each week we produce the show with a goal of offering individuals the best possible information to map their own investment strategy. I’m pleased to have the opportunity to deliver that message as part of the Citadel Media team.”

Chinese Comments Boost Euro and US Markets

Yesterday the market was sharply higher in early trading, and I said I don't like to see the market too strong, too early. Sure enough, by the close the entire rally had faded and the market actually closed down for the day.

This morning, the markets are sharply higher once again in the first hour. Let's just hope we don't have a repeat performance of yesterday's late fade.

The big catalyst this morning is comments out of China that they have denied that they are reviewing their European debt holdings. Yesterday's late day weakness was attributed to a story that China was "looking" at its European debt holdings, and that caused the euro to tank.

The news is boosting the euro, which in turn is weighing on the dollar. Nonetheless, oil is higher again, nearing $73.50, while gold is steady around $1212.

All 10 S&P sectors are higher, led by energy and financials. Real estate is strong also (IYR), and emerging mkt etfs are getting a nice boost.

The second estimate for Q1 GDP showed the economy's growth rate moderating from the initial estimate of 3.2% to 3.0% this time.

Asian markets were higher overnight; the 10-year yield has bounced all the way back to 3.34%; and the VIX is back down to the 30 level. Let's hope it doesn't reverse higher again.

Trading comment: The VIX is down -13% today, a good sign. And the euro is higher. If the euro can stabilize here, it should leave the window open for stocks to continue to work higher. The recent extreme readings in the put/call ratio often coincide with at least a trading bottom. But I will continue to look to make partial sales on strong days to maintain flexibility.

Volatility Index Dips Back Below 30

The market is nicely higher in early trading, following yesterday's late day strength. Of course, readers know that I am always skeptical of a market that is too strong, too early. That leaves too much time for the rally to fade. And it is how the market closes that is most important.

There were some solid economic reports this morning. Durable goods orders for April rose +2.9%, above estimates. And orders for the prior month (excluding transportation) were revised higher to +4.8%, the strongest climb since August 2005.

New home sales also rose more than expected in May, likely aided by the looming expiration of the new homebuyer tax credit. Nonetheless, new home sales hit their highest level since May 2008.

Last, the OECD raised its GDP forecast for 2010 and 2011, but indicated that volatile sovereign debt markets bring risk to their forecast.

The dollar is rising again vs. the euro, but that is not stopping commodities from bouncing. Oil is 3.5% higher to $71.15, while gold is up slightly near $1200.

Asian markets rose slightly overnight, while Europe was up nicely this morning; the 10-year yield is bouncing to 3.22%; and the VIX is down -7% to 32.25.

Trading comment: The markets are still very oversold, and sentiment in the options market is pointing to a trading bottom. The 10-day CBOE put/call and ISEE ratios are now at levels that haven't been seen in over 2 years. This combination should allow the markets to continue to lift, although we need a reprieve from the bad news coming out of Europe.

One of the most positive things I saw today was the VIX dropping all the way down below the 30 level. It has since bounced back above 32, but if it can get back below 30 it would provide a much more benign backdrop for stocks to work higher.

long GLD

HOW DO YOU ANSWER THE QUESTION?

Let me start off by pointing out that we did indeed break below the yearly cycle low yesterday.

I've been saying for a couple of weeks now that a break of 1044 would change the pattern of higher lows. That would be the first warning shot across the bow that the cyclical bull might be in the process of expiring.

Does that mean I want to short stocks? Are you crazy? No way I want to fight with a bear market and the Fed’s printing press. For one Ben has already aborted a left translated 4 year cycle.

Never in a million years would I have believed that was possible, but happen it did. Print enough money and the Fed could just as easily negate a broken yearly cycle low. And if you think he won’t do it I have some ocean front property here in Las Vegas I’d like to sell ya? Sell short? No way no how. Not even with your money.

Let’s face it the mathematics on the short side are just not conducive to getting rich. It took a year and a half for the market to drop 58% in the second worst bear market in history. Sure one can leverage up but if you happen to get hit with a vicious bear market rally or the rules are changed (ban on short selling) you run the risk of losing everything. Need I remind everyone that leverage is what is bringing down the global financial system. Leverage is like walking through a dynamite factory with an open flame. Sure you might survive but you’re still an idiot.

Trading bear markets is tough to do even if the bear is allowed to run its course undisturbed. But I guarantee the powers that be will throw everything they can at the bear. I just don’t need those kind of odds stacked against me, especially when there is easy money to be had.

Now that I’ve made my position clear (just so there won’t be any misunderstanding later. There will be none of this “hey you said the bear is back and we should short stocks. How come the market went up and I lost all my money”).

I’m emphatically telling you that by selling short you are taking your life into your own hands. If you are bound and determined to fight the Fed, Wall Street, Washington and an angry and tricky bear, you are going to do it all on your own. Leave me out of it. I’m going to be over in the corner picking up gold coins, you can join me if you want to.

Whenever the market doesn’t do what it’s supposed to do it’s probably a good idea to pay attention. Yesterday markets all over the world were down and down hard. Some by over 3%. The futures were signaling a big gap down. By all rights the S&P should have followed the rest of the globe lower today. It didn’t. We ended the day positive.

I’ve been warning for over a week now that sentiment has reached severe bearish extremes. Quite a few sentiment indicators are now at levels lower than the `09 bear market bottom. When these kind of extremes are reached the market runs the risk of running out of sellers. Yesterdays reversal may be a signal of selling exhaustion. When that happens, even in bear markets, we can look for a violent 1 to 3 month short covering rally. (In bull markets we can expect a 3 to 5 month new leg up.)

Lately we are hearing the D word (deflation) thrown around quite a bit. Let’s face it we are going to hear this every time assets start to drop. However let me remind everyone that Ben halted the worst deflationary spiral in 80 years in just a little over 7 months. Ben has clearly proven that a determined government, in a purely fiat monetary system, can reverse deflation. The question isn’t whether or not we are going to experience deflation. The question is simply how long will the powers that be allow it to last before they crank up the presses and flood the world with paper again.
 
The cold hard reality is that the USA has now gone down the path of no return. We are piling on trillions upon trillions of debt in a futile attempt to spend & stimulate our way out of bankruptcy. I don’t know about you but generally speaking isn’t it counterproductive to go deeper in debt if one is already broke?
 
This debt can’t possibly be serviced … ever. So we have two choices. One we can eventually just default on our massive mountain of debt. At some point we just throw up our hands and cry uncle. Folks if the United States of America chooses to default on its debt then yes we are going to see a deflationary storm cover the world in ruin and despair.
 
The second choice is to inflate away the debt by printing trillions and trillions of federal reserve notes out of thin air. This course will buy us some time. It may even briefly appear that we’ve cured our problems (it has seemed that way until recently hasn’t it?). If we choose this path, then unless someone like Volker comes along and forces us to take our medicine, the inflationary spiral will continue until a final hyperinflationary storm destroys the country.
 
Now each of you has to ask themselves which you think is more likely. Will the US all of a sudden come to its senses, default on its obligations to halt the exponential growth of debt, thus unleashing a deflationary holocaust upon the world…or will we just continue to kick the can down the road like we’ve been doing for the past 10 years, thus making the debt burden bigger and bigger and rendering it serviceable only by hyperinflating the money supply?
 
How you answer that question will dictate how you want to invest for the next 5-10 years.

If you think like I do that we will continue to kick the can down the road then the easy investment is to just get on board the secular gold bull and hold on.

Are We Looking at a Second Half Slowdown?

Stocks are getting battered across-the-board yet again today, with all of the major U.S. stock indices down 2 percent as of this writing. The Dow is down over 1300 points, or 12 percent, from its recent April 23rd high.

Investor fear is running rampant across Wall Street and around the globe. And, as if the contagious European debt crisis weren’t enough, the markets now have military tensions between North and South Korea to add to their laundry list of worries.

So, the question must be asked: Are we looking at a second half slowdown? Is growth going to come in only around 1-2 percent, instead of say, 3 or 4 percent? Is that the real message of our sinking stock market right now?

We’ve got Spanish banks going down now, bank-to-bank funding stress rising in Europe, gold still soaring, the euro still falling and Nero fiddling. Libor is now up 11 days in a row. Did someone say contagion? Systemic risk? Interconnectedness?

Meanwhile, credit risk spreads between high-yield junk bonds and Treasurys right here in the U.S. have jumped roughly 200 basis points in just the last month. These are not good signs.

Over in Europe, they’re still guaranteeing all of their welfare state countries. That’s wrong. What they really ought to be doing is temporarily guaranteeing their bank debt to avoid a credit meltdown. Let these countries sweat bullets to curb their welfare states.

One silver lining in all of this remains the steep Treasury yield curve. It’s still predicting no double-dip recession. We’ve also got a strong King Dollar which is pushing down energy prices. Gas prices are actually falling heading into Memorial day weekend. This of course becomes a tax cut for American consumers and businesses. That’s a good thing.

One final concern worth noting: if China were to jack up its renminbi right now, that could very well turn into one big global deflationary mistake.

More to be revealed…

On Tonight's Kudlow Report

Tonight at 7pm ET:

MARKETS IN TURMOIL: WITH KING DOLLAR RISING, IS THE WORST OVER?




- Jim Iuorio, Options Action Contributor; Director, TJM Institutional Services
- Don Luskin, CNBC Contributor; Trend Macro Chief Investment Officer
- CNBC's Rick Santelli

GEITHNER’S EUROPEAN BANK STRESS TEST
CNBC senior economics reporter Steve Liesman reports.

DO WE REALLY WANT TO KNOW THE SHAPE EUROPEAN BANKS ARE IN?
The aforementioned panel will weigh in.

CALIFORNIA: HOW DO YOU FIX THE 8TH LARGEST ECONOMY IN THE WORLD?
Meg Whitman, former eBay CEO; (R) California Gubenatorial Candidate

$190 SUPPLEMENTAL STIMULUS BILL; TAX HIKES
CNBC chief Washington correspondent John Harwood reports.

AMERICAN JOBBERY ACT?

- Julian Epstein, LMG CEO; Fmr. Democratic Chief Counsel
- Jerry Bowyer, CNBC Contributor/Syndicated Columnist

Please join us. The Kudlow Report. 7pm ET. CNBC.

Investors Continue To Pare Back Risk

After a late day selloff yesterday, the market has opened sharply lower today. The S&P 500 briefly broke below February's lows, a negative technical signal, but it has since rebounded and the major indexes seem to have stabilized for the time being down -2%.

The concerns continue to emanate mostly from Europe, where debt problems and banking concerns are rehashing scary memories from 2008. I would note that here in the U.S., the problems are much different than in 2008, as we have done a better job shoring up our banking system.

Tensions are also rising in Asia after news that the ship that was sunk in S. Korea may have come at the hands of N. Korea, which continues to make aggressive comments. This helped push Asian markets lower overnight, with Hong Kong and Japan both down more than 3%.

The news from abroad is trumping any positive economic data here in the U.S., including an in-line CaseShiller Home Price report (143.4 vs. 144.1 consensus), and the best Consumer Confidence reading we have seen since March 2008. May consumer confidence rose to 63.3, up substantially from 57.7 last month.

The flow into safe haven investments is prevalent today, with Treasuries rallying, the dollar higher, and gold up again. The 10-year yield is down to 3.13%; gold is higher to $1196; and the VIX is spiking +7.5% to an extremely high level of 41.20. I mentioned yesterday how difficult it is when the VIX is this high, and this morning's market open is a perfect example.

Trading comment: I don't view it as a good sign that the market can't even bounce from these grossly oversold levels. The S&P breaking below February's lows is another negative technical sign. I still think there is a lift at some point, which will provide a better opportunity to get more defensive. I don't like to sell on these big down days when everyone is panicking.

long GLD

ACTION & REACTION

The stock market is really nothing more than a gauge of human emotions. And just like bodies in motion, human emotions also follow the laws of action and reaction.

In simple terms the bigger the bull the bigger the bear and vise versa.

We've had a ring side seat to this as we are witnessing one of the most aggressive bull markets in history unfold after the second worst bear market ever.

Lately we are seeing this play out on a smaller scale in the intermediate swings. After the powerful initial thrust out of the `09 bottom and the final spurt into the second leg top we witnessed a rapid correction of 9%. During that correction sentiment again quickly reached excessively bearish levels. The general consensus was a second deflationary spiral was upon us.

It was of course just a brief profit taking event like I said it would be. But that's beside the point. More importantly the severe bearish sentiment generated a powerful runaway move out of the February bottom.

That extreme move in turn swung sentiment to levels of optimism in line with what we saw at the `07 top.

Now the law of action and reaction has again taken the market to the opposite extreme. Those extreme bullish sentiment levels generated during the runaway move have now produced one hell of a hang-over complete with a mini-crash.

So here we are again. Human emotions have now run to bearish extremes similar to, and in some cases even worse than what we saw at the `09 bottom.

If this is only a correction in an ongoing cyclical bull market then we have now built a massive negative sentiment base from which to launch the next explosive move higher in the ongoing war of action and reaction.

Washington Certainly Isn't Helping Matters

It’s been a rough ride for stocks since the recent April high. Last week’s trading wasn’t pretty, and today’s 126-point drop late in the afternoon certainly didn’t help any. That said, at around $90 a share for the next year, stocks are starting to look pretty cheap after this correction. Maybe it's time to jump in, even with all this blood in the street.

Maybe.

Leave it to Washington to make matters worse. We’ve got a big, fat tax hike on private investment partnerships and foreign earnings of U.S. companies staring at us right now. Thanks Washington. That will of course ensure that we have less private investment. What a neat idea.

Let’s be clear about the consequences of tax hikes: They are nothing but a negative for future growth. Never forget: Growth is the key.

The best social policy we can develop is a capital formation spur that will supply jobs to those that need them. For dignity, to raise the human spirit, and to help folks produce and spend. All of these left-wing, anti-growth, “spread the wealth” attacks on opportunity and economic freedom are Europeanization—something we must devoutly avoid.

One plus I am highlighting right now is the greenback. King Dollar’s rise means a lower energy tax cut. This is a very good thing for American consumers and retailers. It’s also good for industrials, manufacturing and transports. And don’t forget about lower mortgage rates.

Across the pond, this whole Greece and European debt crisis mess remains largely unresolved. Fear is still out there. And while Germany's parliament voted “yes” to the trillion-dollar rescue package, France won’t vote until May 31st. Heck, Italy and Spain haven't even set parliamentary authorization voting dates yet. Huh? Hello? Anybody home? Don’t they know there's a crisis?

As far as the credit markets are concerned, the short-term funding markets for bank-to-bank lending are still stressed with Libor and the TED spread still widening. Not good. Banks are afraid. No one wants to lend. Incidentally, Libor, for three-month loans in dollars recently rose above 0.5 percent for the first time since July 24th. I wouldn’t call that a healthy signal.

Look, I’m still convinced the Europeans need a big-blanket, bank debt guarantee. That would buy them time to get through this chaos, and on the way to much needed, alleged, welfare-state cost cutting. That said, I’m not convinced Greece could even paint the Parthenon on time, let alone afford the paint.

On Tonight's Kudlow Report

Tonight at 7pm ET:

WHILE EVERYONE'S WORRYING ABOUT THE EURO, GREECE AND SPAIN, WILL IT BE CHINA THAT BRINGS OUR STOCK MARKET DOWN?



- John Rutledge, Fmr. Reagan Economic Advisor; Claremont Graduate Univ. Sr. Research Prof; Safanad Chief Investment Strategist
- Peter Navarro,"The Coming China Wars" Author; University Of California - Irvine Business Professor
- Peter Morici; University of Maryland Robert H. Smith School of Business Professor; U.S. International Trade Commission Fmr. Chief Economist

CONGRESS'S CARRIED INTEREST TAX FOLLY?
- John Rutledge, Fmr. Reagan Economic Advisor; Claremont Graduate Univ. Sr. Research Prof; Safanad Chief Investment Strategist
- Robert Reich, Fmr. Labor Secretary; Author, "Supercapitalism"; CNBC Contributor; Univ. of CA., Berkeley, Prof. of Public Policy

OBAMA IMPOUNDING THE BUDGET - SHOULD STOCKS CHEER?
- Jim Nussle, CNBC Contributor; The Nussle Group; Fmr OMB Director; Former Rep.(R) Iowa; Fmr. House Budget Cmte. Chmn.
- Alison Fraser, Heritage Foundation Federal Spending Analyst

BP & THE CRISIS ON THE COAST: 'TOP KILL' OPERATION
NBC’s Jay Gray reports.

BP OUT OF CONTROL... IS BP HURTING US IN TWO GULFS? ARE THEY HELPING IRAN FUND NUKES?

CNBC’s Hampton Pearson reports.

- Frank Gaffney , Center for Security Policy President; Former Asst Secy of Defense for International Security Policy Under Reagan

Please join us. The Kudlow Report. 7pm ET. CNBC.

DUE FOR A BOUNCE

Sentiment and breadth have reached such extreme levels that even if the market has resumed the secular bear trend we are probably due for a strong counter trend move.

You can see from the following chart the number of stocks trading above the 50 day moving average has reached such depressed levels that even in the last bear market these kind of skewed levels have led to sharp rallies.

Now I'm not saying we are in a bear market yet. For me to go that far I would need to see the pattern of higher highs and higher lows broken. That just hasn't happened yet.

We also didn't get a Dow Theory non-conformation at the recent April top. That tends to happen at the majority of major bull market tops. And we certainly don't have a Dow Theory sell signal yet.

That can't happen until the market puts in a secondary low and then that low is broken by BOTH the industrials and transports.

The market is in the process of putting in the secondary low right now. We would need to see the rally out of the impending bottom fail and both averages break to new lows before a sell signal could be issued.

However as I've pointed out a move below the February yearly cycle low would be a big negative and would push the odds in favor of the market breaking below the now due secondary low.

But as of this moment there's no sense in doubling down on the short side into these kind of oversold levels. Even if the market is rolling over again we should see a bounce.

A safer strategy would be to sell into the rally.

However as long as there is a bull market still intact I consider it a waste of time and capital trying to fight with a bear market. Let's face it the second greatest bear market in history only racked up a 58% decline and the odds aren't good that anyone managed to rack up anything even close to that during the volatile bear.

If someone managed to catch even 75% of the move they were doing great. However in less than half the time it took the bear to run its course mining stocks quadrupled or more those kind of gains.

The mathematics of the short side prevent one from making the big money. The reality is that the most one can make on the short side is 100% and even that isn't possible if you are shorting the indexes.

The potential in a secular bull market is typically many multiples of that. Most big bulls tend to move 2000% or more from beginning to end. Realistically one isn't going to get rich on the short side. They may get an ulcer trying to wrestle with the bear and the Fed but they won't get rich.

Those who can ignore the daily wiggles and ride the bull will get rich and a big plus is Ben will do everything he can to help you has he tries to fight the bear.

Euro Falls Agian On Spain Banking Woes

The market is lower in early trading, after the euro falls again. News out of Spain that they had to bailout one of their large banks, CajaSur, has not helped sentiment in the eurozone.

The euro is falling rather sharply against the dollar today. Despite the boost to the dollar, oil is up to $70.50, and gold is nicely higher to almost $1190.

The homebuilders are leading this morning after existing home sales were reported to have spiked +7.6% in April, more than expected.

Asian markets were mixed overnight, but China bounced back +3.5%; the 10-year yield is roughly flat around 3.20%; and the VIX is down another -6% to 37.72.

I think it's important that the VIX is moving lower. The chart below shows the action on Friday, when the VIX surged to a multi-year, but reversed lower to close down for the day. The chart shows that big negative reversal on Friday, and hopefully that implies that the VIX has topped, and will continue to move lower in the weeks ahead.

I have said that I would like to see it get back down below 30 to signify some calm in the markets. It is very difficult to trade when the VIX is over 30, as the market is very prone to large swings at any time.


Trading comment: We haven't done very much with our portfolios. I still think the market should bounce further, and I would look to make some further sales into that bounce. While I am getting a big defensive in our big picture asset allocation, I think for the intermediate-term, the market is more likely to stay in this wide trading range as opposed to breaking down further.

long GLD

TGIF: Market Bounces After Govt. Measures

The Senate passed its version of the financial overhaul bill yesterday. This morning, the market opened sharply lower, but it could have been exacerbated by today's options expiration. The markets quickly bottomed, and have since rallied back into positive territory.

Despite the whipsaw volatility, the volatility index (VIX) is on the decline, and that's a good sign. It spiked to as high as 48 early this morning, but has since reversed lower, and is currently down -8% to roughly 42.15. I would like to see it get back down below 30.

The euro is also bouncing after Germany's lower house approved its part of the EU's rescue package, and traders cover shorts amid speculation that the ECB could intervene to support the euro. While this may have the short-term effect or reducing uncertainty in the market, the bigger picture is more govt. involvement in markets and the economy, and that has never been a confidence inspiring move for investors.

Despite the lower dollar, commodities are weak as global participants continue to look to reduce risk. Oil is trading down near $70, while gold has fallen back to $1178.

The 10-year yield is also lower. It tested the 3.10% level early on, and has bounced back to 3.18% so far.

The financials are leading the action on this morning's rebound, up +2.68%; defensive sectors like consumer staples and utilities are lagging, and are lower by -0.57% and -0.67%, respectively.

Asian markets were mixed overnight. China bounce back +1.1%, while Japan fell -2.5%.

Trading comment: Many traders have been watching the "flash crash" lows in the S&P, which was 1065. That level was breached during this morning's dip, but we have since recovered those levels. I think a more important level to watch is SPX 1044, which marks the lows from February.

If the SPX breaks below its Feb. lows, it will mark the first "lower low" on the charts since March 2009. That would be a significant change in character for the market. Conversely, the market has also made higher highs on each rebound since March 09, but if we can't get back above SPX 1220, which is a tall order right now, that would also be a notable change.

Right now, I am planning on using any significant bounce in the market to get a bit more defensive. I'm glad that I raised cash back when I did, but big picture I will be looking to reduce our equity exposure a bit, and add to some safety areas like select fixed income.

While many participants are looking for lower levels this summer, I would not rule out a wide trading range to persist as well. So the range from SPX 1044-1220 are the levels to watch right now.

An Important Silver Lining

Amidst all of the fear, panic, and growing stock market doom and gloom, I’d like to offer an important silver lining. It’s a little piece of economic optimism. Look no further than the sharply rising U.S. dollar. It has completely stopped inflation dead in its tracks. In fact, as the headline CPI for April reported yesterday showed, inflation has actually slipped one-tenth of 1 percent. Some are calling it the lowest inflation reading since 1960. For the moment, we are witnessing price stability. Not inflation, not deflation, but price stability. Would that it would last.

For ordinary American consumers out there, this is called a tax cut. Gasoline prices have dropped 2.4 percent, despite the fact that we’re heading into the busy summer driving season. When was the last time gas prices fell heading into Memorial Day? So that’s a tax cut. Clothing prices dropped seven-tenths of 1 percent. Another tax cut.

Now back to the sharply rising dollar. King Dollar is always good. In gold terms, the dollar has been very weak, although I notice that gold in dollar prices is back under $1,200. However, the greenback’s surge relative to other paper currencies is depressing energy and other commodity prices. Guess what? That has additional tax-cut implications. In other words, amidst the V-shaped recovery, which includes huge profit gains, a mild commodity correction after a huge run-up is actually a good thing. It has a tax-cut impact for ordinary working Americans.

Sure, fears over the European debt crisis are still out there. I get that. But I’m reaching the point right now where all of this manic Chicken Little stuff is beginning to look overdone. Is it possible that there are too many fears about all those fears? I think so.

Look, I’m not a big fan of fear. I don’t like it one bit. And I do believe the Europeans will defend the euro as a currency — even though its value may slide more, it will not collapse.

But while I’m no better than anyone else at picking precise turning points, I’m actually beginning to wonder whether this recent stock market correction isn’t about to come to an end. King Dollar, price stability, strong profits, and a steep yield curve all suggest that there is good value in stocks after this correction runs its course.

Panic Selling Surges To 2008 Levels

The markets are under severe selling pressure again this morning. There was no real news catalyst, just the same recent trends stemming largely from concerns that problems in Europe are larger than perceived.

The major indexes have been down as much as 3% in early trading, pushing the S&P 500 Index below its key 200-day moving average, which is around the 1100 level. There has been considerable technical damage done to the market, and it won't be erased overnight.

I have said that it is a bearish sign that the market is this oversold and hasn't been able to put together a bounce. The folks at Bespoke put out a note that said that 61% of stocks are currently "oversold", a level that hasn't been seen since March 2009. Still, I feel a bounce coming.

Asian markets were lower overnight; the dollar is bouncing, as the euro weakens again; oil is trading down near $67.75, and gold is down also, touching $1184; the 10-year yield is down to 3.25%; and the VIX has spiked all the way up to 45, which is also a level that we have not seen since March 2009. Amazing.

Trading comment: Looking at the sentiment indicators, the 10-day CBOE put/call and ISEE ratios have surged to levels not seen since the fall of 2008. That's a huge amount of bearishness out there, and represents a true panic to rush into puts as traders scramble to put on downside protection.

Longer-term, if Europe worsens and if Asia continues to slow as well, it could lead to lower levels in the equity markets. But in the near-term, these levels of oversold stocks and bearish sentiment have almost always led to a significant bounce in the markets. I think that is the most likely scenario, so it makes more sense to get defensive after the market bounces than it does to do so today.

FOCUS ON WHAT MATTERS

I know this is hard to do, especially when one is weathering draw downs. And of course a liberal dose of gloating from the bears during these times doesn't help either. But let's not get sidetracked by the little things and let's face it the haters are going to show up every time gold corrects. We really should be used to that by now. They've been doing it for 10 years.

The cold hard reality is that gold is still in a secular bull market and the naysayers are having to ply their trade from ever higher levels.

So let's take a look at what's really happening shall we.

The single most important point everyone should keep in mind is the breakout above the 1980 high of $850. If it wasn't for a once in a generation stock and credit market collapse I don't think gold would have ever dropped back below that level. Even so the move was very brief and has now been tested at the last B-wave bottom.

Folks I seriously doubt the world will ever see sub $850 gold again. Just like we've never seen sub $250 gold after the breakout in the 70's. So anyone forecasting $700 gold just doesn't understand how bull markets work. It just ain't gonna happen.

Next came the breakout above the last C-wave high at $1025.

That breakout was also tested during the February yearly cycle low. I doubt we will see gold back below $1000 for the remainder of this bull market.

Now gold is trying to breakout and hold above the next big resistance level of $1200. The initial break in December was repulsed. Now we have a second break that is in the process of testing the breakout.

Now I have no idea whether this breakout will be the one that holds or whether gold will have to consolidate a bit more. But sooner or later gold is going to break above this level and never look back.

I think we probably have enough time left in the current intermediate cycle for it to happen soon, but if not, I'm confident it will happen and I'm on board and ready for the ride when it does.

My suggestion is when you start to get sidetracked by the daily wiggles or the intermittent draw downs you come back and look at these charts and stay focused on what really matters.

A New Tea-Party Senate Nucleus

After last night’s primary elections, a pipedream came to me: A new tea-party center is forming in the Republican Senate caucus. It will be the first Reagan nucleus in many years, one that will give the GOP a strong limited-government, cut-spending, low-tax-rate, stop-government-controls, and end-Bailout Nation message that will have clarity and gusto and will reverberate throughout the country.

Here’s how it’s going to work: Rand Paul will grab the Senate seat in Kentucky. Marco Rubio will take Florida. Mike Lee will win in Utah. Pat Toomey will finally prevail in Pennsylvania. And Carly Fiorina will knock off Barbara Boxer in California.

Yup. That’s how I see it. And this new tea-party Senate nucleus will join free-market stalwarts like Jim DeMint, Tom Coburn, Jon Kyl, Richard Shelby, Jeff Sessions, and John Thune. I’m probably leaving somebody out in the Senate, and I apologize in advance. But that’s what I’m thinking. It’s a pity Judd Gregg is retiring; he could be part of that group also.

This will be a reformist nucleus, tackling spending, taxes, and even monetary and currency policy. It will unabashedly propose free-market reforms to replace the Obama welfare state and to finally curb the avalanche of debt creation.

It looks to me like the GOP can in fact capture the Senate, by the way. But even if they don’t, this new group will revolutionize politics.

CPI Hints Of Lingering Deflation, Not Inflation

The market is lower again in early trading. Asian markets were lower overnight, and European markets are lower this morning. The Euro is actually getting a bounce today, but so far it is not helping to put a bid under stocks.

One of the things that is a bit worrisome to me is that the market is very oversold, yet it can put together a bounce. The chart below is from my colleague Helene Meisler, and shows how the 10-day moving average of upside-to-downside volume on the Nasdaq is the most oversold its been since 2008. Unfortunately, in 2008 the market bounced, but then went considerably lower. I'm not predicting the same outcome, but the similarity is worth noting.

The next chart shows the relentless decline in the Euro. Yesterday, Germany made some silly comments about banning short selling of its banks. I don't think they figured that if big institutions worried that they couldn't hedge themselves in financials, then they would just short more Euros. This has to be a crowded trade, and I'm wondering when we will see a short-covering rally. If you squint, you can see the small bounce so far today.

The move lower in the S&P 500 (shown below) is pushing the index closer to its 200-day moving average. This is obviously important support levels. But its also worth noting that the slope of the 50-day is flattening out, and will soon begin to slope downward. That usually makes for stiffer resistance on any rallies back. Just another thing to note.

The CBOE put/call opened at an astounding 2.44 (if the data is correct), which makes me think that too many people are leaning the same way. Again, we need some sort of positive catalyst to spark a rally. But if we get one, we could see quite a bit of short covering.

This week is also expiration week, and the VIX is up another +8.8% today to 36.50. So don't discount the potential for some fireworks.

On Tonight's Kudlow Report

Tonight at 7pm ET:

SUPER TUESDAY: YOUR MONEY YOUR VOTE

-HAS THE GOP GOTTEN THE TEA PARTY MESSAGE?
-WILL PUBLIC ANGER LEAD TO REGIME CHANGE IN THE FALL?


- Kellyanne Conway, The Polling Company President & CEO
- Steve Moore, Senior Economics Writer for the Wall Street Journal Editorial Board; "Return to Prosperity" co-author
- Mark Walsh, "Left Jab" Host (Sirius/XM); Fmr. Sr. Vice President at America Online; Fmr. Vertical Net CEO; Fmr. DNC Advisor
- David Goodfriend, Fmr. Clinton W.H. Official; "Left Jab" Co-Host/Air America Co-Founder

SEX, LIES & PRIMARIES...WILL CT AG DICK BLUMENTHAL'S FALSE VIETNAM CLAIMS SINK HIS POLITICAL SHIP?

- Rep. Rob Simmons, (R-CT)
- Kevin Rennie, Hartford Courant
- Kellyanne Conway, The Polling Company President & CEO
- Mark Walsh, "Left Jab" Host (Sirius show); Fmr. Sr. Vice President at America Online; Fmr. Vertical Net CEO; Fmr. DNC Advisor

MARKETS: SHORT-SELLING BAN ON TOP GERMAN BANKS; 4-YR LOW FOR EURO; OIL/GOLD DROP; GREECE RAISING TAXES

CNBC’S Bob Pisani reports.

OIL HEARINGS: CAPPING THE LIABILITY?

CNBC’s Scott Cohn reports.

CONGRESS SEEKS CURBS ON FOREIGN BAILOUTS

- Rep. Jeb Hensarling (R/TX) (co-sponsor of bill to ban EU bailouts)
- Vincent Reinhart, American Enterprise Institute resident scholar; fmr dir of monetary affairs at the FOMC

Please join us. The Kudlow Report. 7pm ET. CNBC.

Volatility Falling, But Still At High Levels

The market is slightly higher in early trading. Yesterday, the market was down quite a bit, but a big late day rally brought the major indexes all the way back into positive territory. This is a good initial sign, and possibly the beginning of a bottoming process. But we need to see the market find further support.

Also, the volatility index (VIX) is down -6.0% right now, but still at high absolute levels around 29.0. The VIX also spiked higher yesterday, reaching the 35 level, but reversed hard to close lower on the day. The VIX closed around the 26 level at the February bottom, so I would like to see the VIX come down a little from current levels to get me more bullish.

There were a few good earnings reports this morning from blue chips like Wal-Mart (WMT) and Home Depot (HD), and also a couple of solid economic reports. Housing starts rose +5.8%, above consensus estimates. And the PPI for April showed a -0.1% decrease when a slight gain was expected.

Looking at the macro picture, the Euro is bouncing further, which is holding back the dollar. This is helping commodities bounce, with oil bouncing +2.5% to $71.85. Gold is trading down, falling to $1215.

Asian markets rose overnight, with China bouncing back +1.4% amid reports the govt. may hold off on further tightening measures due to uncertainties in the global economic outlook.

The 10-year yield is lower to 3.43%.

Trading comment: Yesterday's late day rally was a nice start, but we need to see the market continue to find support. That doesn't mean we can't have a down day again here and there, but it means I don't want to see the SPX or Nazz undercut yesterday's lows. Additionally, I would be looking for a follow-thru day where the market has a big rally on above-average volume.

In the meantime, I am continuing to watch those stocks that are holding up the best during this correction. That is often a good indicator of which ones will rally the quickest when the market stabilizes.

Gangbuster Greenback

A strong and steady King Dollar is always essential to overall free-market prosperity and economic growth. But a wildly fluctuating greenback is not.

Since last November, the trade-weighted dollar index has risen roughly 16 percent. Moreover, the dollar has jumped approximately 25 percent against the euro alone. Of course, the euro’s collapse is a function of the debt crisis in Greece and the European debt-default contagion threat. But roughly 15 percent of U.S. trade is done with the European area. So here’s my point: This huge dollar jump against the euro negatively impacts the terms of trade for U.S. exporters and the S&P corporate profits of global companies.

It’s a deflationary influence when the dollar shoots up way too fast. Incidentally, during the dollar-appreciation move that began late last year, the stock market has basically stopped advancing. In fact, since mid-April, when the dollar made another big move versus the euro, cyclical sectors like commodity materials, energy, industrials, and retailers have gotten clobbered by nearly 10 percent. There is clearly a dollar influence going on here.

Look, currency stability -- a steady King Dollar -- is what we want for growth. We need steady money. But with all these currencies fluctuating so wildly right now, it’s difficult to see how a dollar that keeps shooting higher and higher is going to be a good thing.

Then, of course, there is the related currency issue of a surging gold price. Gold, in dollars, euros, and everything else, is roaring higher. It is saying a pox on all your houses. That’s the message. Too much deficit spending. Too much debt. Too much central-bank liquidity, especially since the European Central Bank threw in the towel.

Nothing good ever came out of a gigantic gold move like this. Nothing. It reminds me of the 1970s, when gold shot from $35 an ounce to $800 across a ten-year span. Look, in just the last ten years, gold has gone from $250 to $1,230. Historically, that’s a stagflation signal. It’s not good.

We need steady money and much smaller government. And guess what? We’re not getting it.

I don’t want to see the dollar shooting up by leaps and bounds every week. I want a steady dollar. And I sure don’t want to see gold shooting up by leaps and bounds every week either. These are terrible signals. And the currency complication is screwing up the other Washington problems of too much taxing and spending and debt creation.

It’s all another big V-shaped economic worry.

Monday Morning Musings

The market is hanging in there in early trading, following Friday's selloff and Asian markets being down significantly overnight. China was hit especially hard, down -5.1%.

Despite Friday's selloff, last week still showed a bounce from the previous week's shellacking. The S&P 500 rose +2.23% last week, and the Nasdaq 100 recouped +3.12%.

The euro remains the primary story. Overnight, it fell to a 4-yr low vs. the dollar, but it has since bounced from those levels. The gain in the dollar is weighing on oil again, which is approaching $70.50. Gold is higher again, up another $8 to $1235.

This morning, Bank of America reported that credit card defaults in April rose slightly, while total delinquencies were down from March levels. Separately, the Empire State Manufacturing Survey fell to 19.1 from 31.9 last month.

Among sector ETFs, consumer staples (+0.8%) are leading the way, followed by industrials (+0.18%); energy (-1.46%) is the weakest, followed by financials (-0.52%).

The 10-year yield is a bit higher to 3.45%; and the VIX is hovering near the 31.34 level after Friday's sharp spike higher.

Trading comment: The markets feel calmer today, but I am surprised that the VIX isn't falling. I have not reviewed my sentiment indicator roundup from last week, but I hope to see an increase in bearishness to help put in another trading bottom. We are roughly 2 weeks into this current selloff, so in terms of time, I think we still have more to go. Corrections often take 4-6 weeks to run their course, although the timing can vary.

Technically, the S&P is kind of in no-man's land, floating halfway between its 50-day and 200-day moving averages. Soon, the 50-day looks like it will begin to slope downward, which has a way of acting like stiffer resistance if and when we get back there. Thus, I'm not ready to get aggressive, preferring to bide my time.

long BAC

STILL A CYCLICAL BULL

Until the pattern of higher highs and higher lows is broken this will remain a cyclical bull market. Shorts trying to jump the gun run the risk of getting caught opposite the Fed's printing press.

The secular bear trend can't resume until a yearly cycle bottom is broken. That yearly low came this year on February 5th.

As long as the decline holds above that level this will continue to be an ongoing cyclical bull market.

If the decline were to break 1044 then we would have our first warning that the secular bear trend has returned. The correct strategy would not be to sell the break though. Sentiment has skewed extremely bearish already. That kind of sentiment almost always spawns a multi-month rally in bull markets and a powerful counter trend rally in bear.

A safer strategy would be to sell the rally not the breakdown.

Breakdown City

Washington, D.C., is breakdown city. There are the fiscal breakdowns of unaffordable Obamacare with two new entitlements, and an unaffordable $862 billion stimulus plan that has had little or no economic impact. There's the economic breakdown of a spread-the-wealth tax attack on investors and successful earners. There's the loan breakdown of a full-scale government assault on the banks, including a $90 billion bank tax. And there's an inflation breakdown as more doves are being appointed to an already too-ultra-easy Federal Reserve.

These are all anti-growth policies. Yes, the economy is in the throes of a V-shaped recovery. I've been saying that for months now. But is this recovery a temporary false dawn, or can we be confident it has legs? Will Washington's deficit-spending and debt-monetization policies be reversed, or is the soaring gold price a true negative signal for the future?

And is the prosperity path really in our future? Or are we going down the welfare-state road of Old Europe?

Will we grow, or will we stagnate?

The markets got whacked this week as more government agencies whacked the banks. The G-men have launched a full-scale bank assault. And for what? Do they really want us to go back to using Indian wampum, or do they want a healthy and recovering banking system to provide credit to the economy? Bail out the banks, then criminalize them, then throw them in jail? Huh?

It's breakdown city. Nothing good can come of it.

The Drought Continues

I have been moving my offices yesterday and today (and all weekend), which is why my blogging has been disrupted a bit. This morning, I am officially in mourning for my beloved Cavaliers, who once again disappointed the Cleveland faithful by posted the best regular season record in the NBA but not making it past the second round of the playoffs. I'm sure LeBron will be leaving this summer (he is a free agent), and the drought for a Cleveland championship will continue. Such is life.

The markets look to be equally upset this morning, although I'm not sure the consternation emanating from Europe surrounds whether or not LeBron is leaving for another team. It appears that the enthusiasm that began on Monday over the Euro-TARP plan is slowly morphing into lingering concern about how it will truly cure what ails those countries.

European bourses are all lower, and Asian markets were lower overnight as well. The Euro is breaking down to fresh lows, which is boosting the dollar. The flight to safety trade is on, into the dollar, into Treasuries, and into gold.

Gold nearly hit $1250 this morning, but has since pulled back; The 10-year yield is lower to 3.43%; and the VIX is spiking +21% to 32.35.

Trading comment: I mentioned earlier this week that the major indexes had rallied back up to their overhead 50-day moving averages, but that those levels would likely act as resistance for now. This appears to be exactly what happened. I probably could have taken further profits around those levels, but I have already raised quite a bit of cash in our accounts, and I am watching this next leg of the pullback to see where I would like to add some exposure.

Last Friday's adds worked well, although we were quite a bit more oversold. I will most likely sit on my hands today, in terms of trading.

Have a good weekend.

long GLD

The Path to Prosperity: Tonight On The Kudlow Report

Tonight at 7pm ET:

Please join us this evening as we welcome two wise men from Wall Street ... Home Depot co-founder Ken Langone and former New York Stock Exchange chairman Dick Grasso.



Topics will include the government's assault on banks, the fiscal breakdown, gold rally, taxes, mid-term elections (is political regime change coming?) and what really went wrong during last week's stock market drop.

Please join us. The Kudlow Report. 7pm ET. CNBC.

Riding the Inflation Wave: On Tonight's Kudlow Report

Tonight at 7pm ET:

A SPECIAL EDITION OF THE KUDLOW REPORT:

-RIDING THE INFLATION WAVE
-GOLD HITS RECORD HIGHS
-THE GLOBAL SPENDING TSUNAMI DRIVES MARKETS WORLDWIDE

THE GOLD RUSH
CNBC’s Sharon Epperson reports.

Special guest … Peter Munk, Barrick Gold founder & chairman will be aboard.

GOLD, INFLATION POLITICS - APOCOLYPSE NOW?

- Sen. Judd Gregg, (R) New Hampshire; Budget Cmte Ranking Member
- Robert Reich, Fmr. Labor Secretary; Author, "Supercapitalism"; CNBC Contributor; Univ. of CA., Berkeley, Prof. of Public Policy

WASHINGTON & THE BP OIL SPILL … BP'S LIABILITY RAISED RETROACTIVELY?
CNBC’s John Harwood reports.

- Sen. Judd Gregg, (R) New Hampshire; Budget Cmte Ranking Member
- Robert Reich, Fmr. Labor Secretary; Author, "Supercapitalism"; CNBC Contributor; Univ. of CA., Berkeley, Prof. of Public Policy

IS THE NEXT FISCAL PAIN IN SPAIN?
CNBC’s Simon Hobbs reports.

U.S. EXPOSURE TO EURO BAILOUT
CNBC’s Jeff Cox will be aboard.

THE GOLD RUSH: BULL VS BEAR

- Andy Brenner, Guggenheim Securities Head of Emerging Markets
- James DiGeorgia, gold bull, Super Stock Investor; "The Trader’s Great Gold Rush" Author
- John Rutledge, Rutledge Capital Chairman; Fmr. Reagan Economic Advisor

Please join us. The Kudlow Report. 7pm ET. CNBC.

Market Attempting To Stabilize, But Early Gains Hard To Maintain

The market is rallying again in early trading, although we saw this pattern yesterday, and by the close the strength had faded such that the S&P 500 actually closed down yesterday. Let's hope today's strength proves more lasting.

The early strength seems to stem from Europe, where there was no significant news other than some tough talk from Spain about their deficits, but the markets there rallied and that emboldened buyers in the U.S.

The dollar was flat earlier, but it is starting to rally a bit as the euro slides again. Oil is trading up slightly near $76.70, but gold is having another strong rally, and breaking to new highs near $1240. That's a pretty big move, and the love affair with gold seems to be building. Although I have not had the usual calls from unsophisticated clients asking me to buy them more gold yet.

Among the sector etfs, tech is leading (+1.87%), followed by industrials (+1.52%), while consumer staples are lagging (+0.15%). Among the sub-sectors, transportation is up +2.0%, and defense is doing well (+1.60%) also.

Asian markets were mixed overnight; the 10-year yield is higher to 3.56%; and the VIX is falling -10% to 25.50, a good sign for the bulls.

Trading comment: The S&P and Nasdaq are rallying back toward the underside of their overhead 50-day moving averages. I need to see these key levels recouped to make me more bullish. On the plus side, the small-cap Russell 2000 has already recaptured its 50-day, so maybe it is acting as a leading indicator. We shall see. The S&P needs to close above 1173, and 2416 for the Nazz.

Another positive is that the put/call ratios have been very high for the past 5 days in a row. This is a good contrarian sign, in the sense that prior trading bottoms in the market have been preceded by spikes higher in bearish sentiment. So this too bears watching.

Some leading stocks continue to act extremely well (AAPL, FFIV, VMW, CRM, NFLX, DECK), while others look like they have broken down (GOOG, PCLN).

long AAPL, FFIV, GOOG, GLD, VMW

BREAKOUT

Gold finally broke out to new highs. That puts the odds squarely in favor of a C-wave continuation.

I went over a bit of strategy in tonight's report for those not already in. I'm going to go over stats and cyclical structure for the remainder of the C-wave in tomorrow's report.

For those of you thinking about getting side tracked by a meaningless daily cycle low that is coming due, let me tell you from bitter experience the one thing you don't want to do is lose your position at the beginning of a C-wave or C-wave continuation.

At this point the daily cycle corrections aren't profit taking opportunities. That will come as we near the end of the C-wave.

At this time a daily cycle low is a last chance opportunity to get as  invested as you are comfortable with, whether that be 50%, 75% or 100% will be up to each individual.

Don't forget in bull markets and especially during aggressive C-wave advances the surprises come on the upside. Daily cycles can and often do run exceptionally long as a C-wave starts to gain momentum so losing ones position in an attempt to "time" a short term correction can potentially cost one many percentage points. It's just not worth the risk. This is the time to heed "Old Turkey's" advise.

Folks I have no doubt this will be the greatest bull market that any of us will ever see in our lifetime. Since November of `08 the precious metal sector has been doing everything but hit investors over the head with a pipe to let us know this is the leading sector of this bull.

Miners are the only sector exhibiting massive accumulation.

Compare the above chart to other sectors during this bull and you will see where the smart money has been positioning.

These are just a few sectors, but the picture is the same no matter where you look. Steadily declining volume. Only miners are showing heavy accumulation.

Once the HUI & silver join gold, platinum and palladium at new highs the entire precious metal sector will move into a vacuum with no overhead resistance.

That is going to be incredibly bullish for the sector.