ARE YOU WILLING TO PAY THE PRICE?

I'll start off by saying that I don't think the recent selloff is going to be an intermediate type decline like we saw in January and February. It's probably too early. Most intermediate cycles have three daily cycles nested within them.

This is only the first daily cycle correction. We should still have at least one more daily cycle yet to go and it's probably more likely we have two with the next intermediate term decline coming around the end of summer.

Let's face it the market has only dropped 3.8% so far. Even if it reaches the 1150 support level we would still only be looking at a meager 5.7% decline.

I have to ask is it really worth all the false starts and multiple losses trying to catch a minor short trade in a cyclical bull market? Let's face it virtually no one is going to sell at the exact top and exit at the exact bottom so the odds aren't good one would catch even 5%. And if the bull does something to surprise us a profitable short position can evaporate overnight. Hey all it would take would be the Fed extending the TARP program or another round of QE and any correction would be aborted immediately. No, it's just not worth the big risk of big losses for small returns.

Shorting a bull market just isn't a very profitable way to make money.

That being said I like the way gold and miners are holding up so far. Neither one has even dropped below the 10 DMA yet.

All four of my conditions  have been met. That means I'm back in " Old Turkey" mode. The goal is to reach strong hand status again. You don't achieve that by trying to time every little wiggle.

Now I'm certainly aware that this could be an A-wave topping out and I might have to ride a B-wave down. I'm perfectly willing to do that. Let's face it in the big scheme of things any B-wave at this stage of the game is just a minor blip. A blip that we won't even be able to see on the chart by the time the bull is finished.

So if I must I will twiddle my thumbs while I wait for the next C-wave.

For multiple reasons though, I don't think this is an A-wave. I think this is still an ongoing C-wave that has one last explosive move higher. On the chance that I'm correct I don't want to lose my position now.

I'll let the day traders worry about the short term wiggles :)

Hey if I'm wrong the bull will correct my timing mistake anyway.

SELL-OFF ... SPECIAL KUDLOW REPORT TONIGHT

Tonight at 7pm ET:

INSIDE THE MARKET SELLOFF…

- CNBC’s Bob Pisani
- CNBC’s Scott Wapner
- CNBC’s Rick Santelli
- CNBC’s Bertha Coombs

CONTAGION FEAR…GREECE SENDS SHUDDERS TO INVESTORS AROUND THE WORLD…WILL GERMAN VOTERS SINK THE GREEK BAILOUT? … ARE SPAIN & PORTUGAL NEXT?

- Lou Dobbs, Business & Political Commentator
- John Rutledge, Rutledge Capital Chairman; Fmr. Reagan Economic Advisor
- Lee Eugene Munson, Portfolio Asset Management Chief Investment Officer
- Steve Grasso, CNBC Market Analyst; Stuart Frankel, Managing Director of Institutional Sales

FEAR FACTOR & THE MARKETS… HOW TO PLAY THIS SELL-OFF

- Jim LaCamp, Macroportfolio Advisors Sr. VP, Portfolio Manager
- James Altucher, Managing Director Formula Capital
- Lauren Tara LaCapra, The Street
- Lou Dobbs, Business & Political Commentator

BP OIL SPILL LATEST
- Jay Gray, NBC News - Venice, LA

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

Keynesian Spending Has Zilch Effect on Recovery

Stubbornness is a bad trait in politics and policy, one that will be punished at the polls this November.

The Obama administration continues to argue that its massive federal-spending campaign is essential to economic recovery. Yet the latest GDP report from the U.S. Department of Commerce shows that the 3.2 percent first-quarter economic growth rate got no help from government spending.

In fact, combined federal, state, and local spending actually fell 1.8 percent. What’s more, over the last three quarters of a mild V-shaped recovery, with an average quarterly rebound of 3.7 percent, government spending actually exerted a small net drag (-0.03%) on growth.

I guess it’s time to ask our Keynesian friends in and out of government what exactly happened to those vaunted multiplier effects they so loudly proclaimed. So far, there is zilch effect.

Turns out that all those entitlement transfers of income borrowed and taxed from Peter to pay Paul have made no direct contribution to the nation’s production of goods and services. This, however, comes after $318 billion of spending through April 23, according to the website recovery.org.

Pretty expensive fiscal habit, wouldn’t you say? But for what?

And who can blame taxpayers for saying, “Show me the money that was supposed to generate growth.” In the winter quarter, consumer spending increased 3.6 percent and business equipment investment rose 13.4 percent, all while inventories were rebuilt by $31 billion. But the G in the GDP equation C+I+G+(X-M) actually dropped. (That is, consumption + investment + government spending + the net exports/imports trade.) That’s right, dropped.

That failed G for federal, state, and local spending may cost untold trillions of dollars of future tax and debt burdens. Rather than stimulate growth, this will depress it in the years to come — unless we do something about it.

How about stopping the madness right now? How about “de-stimulating” the remaining $500 billion of unspent Keynesianism?

And how about some truth-telling about the big pick-up in business profits that is really behind the recovery — profits that have fueled a stock market boom which has created trillions of dollars of new wealth through capital gains that are being spent and invested in the private sector?

The only temporarily effective government-stimulus effect is coming from the Fed’s free-money, zero-interest-rate policy. And here, too, is stubbornness. For the economic emergency has long passed; the recession ended in last year’s second quarter. Yet the Fed — now controlled by Obama doves — stubbornly persists in maintaining an emergency pump-priming policy that surely will drive up inflation in the years ahead.

Worries Spread From Greece To The PIGS

The market is a funny thing. Yesterday the market rallied as it ignored the problems bubbling in Europe. Today the worry is back on the front burner, as yields in Greece spike higher, and the markets in Spain, Portugal, Ireland, etc. take a hit on fears that they could run into similar problems like Greece.

There were some more positive economic reports this morning. Factor orders were surprisingly strong at +1.3%, and pending home sales for March rose +5.3%. But that data is obviously being ignored at the moment.

Ditto the positive earnings reports from today for the likes of Merck (MRK), Pfizer (PFE), and MasterCard (MA).

The flight-to-safety trade appears to be in effect, as investors rush to safe havens like Treasuries. The price of the T-note is up today, pushing the yield down to 3.62%. Also, the new safe haven trade appears to be gold, which topped $1192 earlier.

The dollar is also at fresh 11-month highs, which is weighing on most commodities. Oil prices are down 1.8% near $84.50.

Among the sector ETFs, energy is down the most (-3.2%), followed by industrials (-2.9%). Healthcare is down the least (-0.55%). Among the industry etfs, homebuilders are down -3.38%, and emerging market etfs are being hit particularly hard.

Asian markets were also lower overnight; and the VIX is spiking +21% today to 24.43, taking out last weeks highs.

Trading comment: Today is one of those days where you wish you simply didn't own anything, although I do have a couple of stocks on my screen that are bucking the weakness so far. Visa (V) is up, and my recent pick GMCR is flat.

Yesterday I mentioned that the market rallying back up to resistance at its 20-day might not last. And right on cue the markets are back in correction mode. The next stop on the charts is the 50-day averages, which stand around 1169 for the S&P 500 and 2404 for the Nasdaq.

It hasn't been easy to hold all this cash lately, but it feels better on a day like today. The goal is to have a cash cushion during the decline to make it easier to ride it out, and also to have ample buying power to take advantage of the pullback and add to positions at lower levels.

long GMCR, V

Six Reasons Why the Capital Gains Tax Should Be Abolished

Here's my friend Dan Mitchell's latest video. As usual, it's definitely worth watching.

According to Dan: The correct capital gains tax rate is zero because there should be no double taxation of income that is saved and invested. This is why all pro-growth tax reform plans, such as the flat tax and national sales tax, eliminate the capital gains tax. Unfortunately, the President wants to boost the official capital gains tax rate to 20 percent, and that is in addition to the higher tax rate on capital gains included in the government-run healthcare legislation.

Monday Morning Musings

The markets are bouncing after Friday's drubbing. There was news this morning that Greece will in fact receive a financial aid package from the EU and IMF to the tune of $146 billion. The problem, and one of the reasons that the euro is still lower today, is that many investors remain concerned that the problems with other European nations still looms despite Greece getting a bailout.

We also saw a strong ISM Manufacturing report this morning, rising to 60.4 from 59.6 in March. This is helping stocks in the industrial sector rally this morning, in addition to the news that United Airlines and Continental will merge.

Commodities are higher, despite a bounce in the dollar index. Oil prices are up to $86.60, and gold has topped $1187. Despite this, the energy stocks are mostly lower, with negative sentiment lingering from the oil spill in the gulf.

Japan and China markets were closed last night, but that didn't stop China from raising its reserve requirement for banks again. China continues to tighten its monetary policy and try to prick the property bubble there. We know that most bubbles don't deflate in an orderly manner, so the situation in China bears close monitoring.

The 10-year yield is higher to 3.69%; and the VIX is -3.75% lower after Friday's bug surge higher, down to 21.22.

Trading comment: I started a new position in GMCR on Friday, but that was about it. Although the markets are bouncing today, the major indexes are still below their 20-day moving averages that were broken on Friday. I still expect more choppiness ahead, and will look to use future down days to pick away at stocks/etfs at lower prices.

long GMCR

ON THE VERGE OF AN INFLATIONARY SURGE

I'm going to start off by stating that I don't think Bernanke is going to "get away" with the insane monetary policy he's chosen.  Printing trillions of dollars, cutting rates to zero, trying to manipulate the bond market and generally tampering with the natural market forces is going to have consequences. 

There is a price that will have to be paid for this madness. Just like there was a price we had to pay for Greenspan's reckless attempt to avoid a recession when the tech bubble burst. Greenspan certainly bought some time and a brief period of illusionary prosperity. But he did it by creating a housing and credit bubble. When those burst as all bubbles do, the fallout was much worse than if we had just weathered the recession to begin with.

Ultimately all of Greenspan's and Bernanke's efforts have just loaded the nation with a monstrous debt burden that we will never be able to repay and soaring unemployment that isn't going away anytime soon.

Now I’m afraid Bernanke has probably let the inflation genie out of the bottle with his reckless actions. That means surging commodity prices. The fact that almost all commodities resisted the stock market decline on Friday is an ominous warning sign.

Both heating oil and gasoline broke out of recent consolidations on Friday despite huge selling pressure coming off the stock market.

It now looks like we've probably seen the cycle low in oil.

If oil follows the gasoline and heating oil markets to new highs (and I think it will) I'm afraid we are going to get a strong surge higher. And if we did just see the cycle low a few days ago this push could last some time as the average cycle in oil has been running roughly 50 days trough to trough.

Gold has also broken above the recent resistance level with follow through this time.

Gold is also early in its daily cycle so we could see a strong push higher here also. I'm expecting gold to at least test the highs during this minor cycle advance. And I'm leaning fairly strongly in the direction of a C-wave continuation for the reasons I outlined in the weekend report for subscribers.

Keep in mind that all this is progressing despite a strong dollar. Of course that is just an illusion. It really isn't possible to print trillions of dollars out of thin air and have a strong currency. The dollar just appears strong because the currencies it's measured against are exceptionally weak right now. The relentless rise in most commodity prices reveals the truth about the dollars value.

We are now on the verge of a surge (maybe a huge spike) in inflation.

I think Bernanke is about to get served notice that he didn't fix anything. All he did was create a much bigger problem. Unfortunately you and I are the ones that are going to pay for his mistakes with higher taxes and much higher inflation.