I made that  comment yesterday after watching the 10-year Treasury Note Yield ($TNX) pop from a pivotal level at 3.800%. Notice the upside follow-through today.

My conviction was doubled when I watched the Dow crack above 11,400 in the face of the super spike in crude oil.

It all added up to a pretty easy trade this morning: buy stocks.

Crude is screaming higher. +6 at this point, trading above $121 a barrel.

I was bullish on crude at $115 to $116, about one week early. Same goes for oil stocks. Both trades are showing a nice profit today.

If  you're in oil-related plays, you can take a few profits here and let the remainder ride with protective stops.

Meanwhile, the Dow's only down 40 points. It sure seems like stocks want to rally.

Thursday is going to be an interesting day.

Crude oil is up to $118 a barrel. As you might imagine, the dollar is down by a lot.

The yen is up by about 1.5% versus the dollar. Remember that the yen is a measure of fear and anxiety.

I made the observations earlier in the week that the summer trends of a strong dollar, lower oil prices, and higher stock prices were growing tired. This morning, we're seeing an acceleration of the reversal and a handsome payoff to anyone positioned to take advantage of higher oil prices, for example, or a weaker dollar.

Remember that a stronger dollar and lower oil prices have been two catalysts for the summer rally in stocks.

What remains to be seen is how stocks react. Fannie Mae (FNM) is below $4 in pre-market and Freddie Mac (FRE) is trading with a 2-handle.

If you told me that FNM and FRE were on the verge of going away in their current forms and that oil was up by 2%, I would tell you that the Dow was going to be down by at least 200 points. But it's not. Dow futures are lower by about 60 points at the time of writing. Treasuries are flat. It's almost as if the market doesn't care if FNM and FRE  go bust, so long as the U.S. government backs their debts.

Today should be an interesting one. I expect a lot of volatilty and I'm open to trading either side of the market.

The market did a pretty good job at shrugging off Fannie Mae (FNM) at $4 and Freddie Mac (FRE) at $3.

FNM @ $4

FRE @ $3

Wow!

Don't be surprised if FNM and FRE are in the headlines in the next few days. More importantly, don't be caught off guard by the headlines. Observe the market's reaction to the news and don't trade based on the headlines.

This morning's opening swoon lower was a classic reject and reverse. The market rejected the lower prices and reversed higher.

It sort of makes sense that the dip buyers would show up this morning, after a couple of big down days.

This morning's reversal is also a reminder to not chase moves and to pick your spots carefully.

Trade to make money; don't trade for the sake of trading. It's just that it requires a lot of patience to make money in this market.

I wrote about the shift in summer trends in yesterday's post, pointing to the recent weakness in the Dow and S&P as a precursor to downside in stocks in general.

Today, we're seeing the downside.

Financial indicators like Fannie Mae (FNM) and Freddie Mac (FRE), Merrill Lynch (MER), and Lehman Brothers (LEH) are trading at or very near 52-week lows.

The Bank Index ($BKX), put on the radar last week, is falling by a lot more than the broader market.

Meanwhile, the recent catalysts for higher stock prices, namely a strong dollar and weak oil, are reversing their recent trends. While still small, the pullback in the greenback and bounce in crude are enough to cause a sell-off in stocks.

Although these reversals are making sense, and fit within the bigger picture, I want to caution you from chasing the recent moves and over-leveraging higher crude, for example, or weaker bank stocks.

This is no market in which to fool around and take excessive risk.

Importantly, one of the leading indicators that pointed to lower stock prices in recent days was the Ten-Year Treasury Yield ($TNX). Notice that it's bouncing from 3.80% -- a level I've been writing about.

Forget about the PPI Headlines and focus on how the TNX is reacting to the news.

I'm using this move in the TNX as a reason to not press bets in this tape, to pick my spots carefully, and to keep risk in check.

We still have a few weeks left of the Summer of '08. Accordingly, expect conviction levels and volume to remain low. So, keep any forthcoming moves in this context.

With the caveat out of the way, I want to share a few observations on some of the market's bigger themes since early July. I'm seeing some of these themes run out of steam.

Stocks

July 15 marked a market low. Since then, stocks have moved higher by a lot. But in the last few days, the Dow and S&P failed to make new cycle highs. The NASDAQ and Russell 2000 did make new highs.

Perhaps the upward trend is growing tired and the Dow and S&P's divergence marks the beginning of the pullback.

Bonds

Treasuries sold off with stocks in early July. But in late July, Treasuries started to rally again. They have since rallied to near the July 15 highs.

The 10-Year Treasury Note Yield ($TNX) is today trading near 3.80%. This is an ominous sign for stocks.

Dollar

The dollar's been on an historic rally for a couple of different reasons. There's definitely been a fundamental shift in the dollar and the sentiment that surrounds it. Nevertheless, the greenback is growing a bit tired.

Furthermore, let's not lose sight of the fact that the dollar is mired in a secular bear market that began in 2002. Back then, the U.S. Dollar Index ($USD) was trading near 120. Today it's at 77.

Crude Oil

With the dollar growing a bit tired, crude oil has stabilized. These two instruments are closely correlated, so any downside in the dollar should be met with bids in crude.

But like the dollar, there's been a fundamental shift in crude oil this summer. It's the acknowledgement of the fact that the global economy is slowing and that will lead to reduced demand for oil. Therefore, any forthcoming rally in crude will most likely be met with supply.

I've been watching the 10-year Treasury Note Yield ($TNX) diverge from stocks over the last couple of days. The TNX has gone in the opposite direction of stocks since the dip buyers showed up on Wednesday.  I've been using this divergence as a reason to short stocks, mostly on rallies. Put another way, I'm trying to sell the rips.

The TNX hit a short-term low on July 15, the same day as stocks. The TNX bounced from roughly 3.80%, reaching above 4.10%. Today it's trading at 3.85%.

What we're seeing is more money moving into Treasurys, even at these low yields and seemingly high inflation, at a time when stocks are drifting higher on low volume.  Keep in mind, too, that energy prices are plummeting and the dollar is strengthening. Aren't these two positives for stocks? That's the conventional wisdom anyway...

So, the question is:  Why are investors moving into defensive positions in Treasurys?

Importantly, is the move  to Treasurys actionable? I think it is. 3.80% -- the July 15 low -- is the magic number. A breakdown in yields below 3.80% might lead to a breakdown in the upward trend in stocks. Then again, yields could rebound from 3.80% next week, too, sending stocks to new relative highs. Either way, the 3.80% level is actionable going into next week.

The Japanese yen is a great measure of fear and greed. LIke the VIX, fear is high when the yen is high; fear is low when the yen is low.

I'm putting focus on the yen because it's the first foreign currency to stabilize and rally against the dollar. In fact, the yen has moved higher in the last two days. Part of this recent move in the yen is in response to the pullback in stocks.

You might use the yen to confirm any further pullback in stocks and especially a breakdown of the recent upward trend. Use the FXY to track the yen.

A remarkable move is underway in the U.S. dollar. The euro is down a staggering 2% against the greenback. This is a huge move for the currency market.

The dollar is The King of Currencies at the moment.

Of course this means oil is lower, which in turn is putting a bid in stocks.

Crude is trading at the lower-end of the support zone at $116, down by almost $4 a barrel.