Happy hump-day, fellow traders. How was your Wednesday? If you're not entirely sure what to make of Wednesday's market action, don't worry - you're not alone. Monday's and Tuesday's implosion certainly planted a few seeds of doubt about the market's near-term health, yet stocks were just strong enough today get some people thinking "hey, there may be a little more life left in this rally after all." It's not like we haven't seen this kind of duality before. I tell you what though... I've been a market professional (one way or another) for nearly a couple of decades now, and the severity of the emotional tug-of-war we're seeing now is very, very unusual. The end result of all this odd stuff is not only a market that doesn't make sense, but a market that's tough to navigate. Don't worry - I'm not going to get on my soapbox and throw a sermon at you today. I am, however, going to show you a handful of things that just don't add up right now, beginning by re-opening a can of worms we opened on June 20th with a deep look at the NYSE's total short interest. Things That Make You Go Hmmm.... Some of you may remember the June 20th edition of the newsletter, in which we pointed out how as of mid-March the NYSE's short interest was not only no longer growing, but had actually shrunk between mid-March and mid-June. It was an important idea at the time, as some pundits were still banging a bullish drum, suggesting a huge short-covering rally was going to prod the market even higher. Had they actually looked at the data the way we did, they would have seen the short-covering rally had already materialized - there wasn't a lot (if any) short-covering fodder left to keep driving stocks higher. Care to guess what happened in the meantime? Yep, rather than the NYSE's short interest continuing to subside, it actually popped up again. As of mid-June, the exchange's short interest rose back to 14.531 billion shares. This is the highest short reading we've seen since mid-March, when it peaked at 14.676 billion shares. The proverbial "so what", this isn't the way things should be in a normal environment. Broadly speaking, short interest rises rapidly when stocks are tanking (or look vulnerable), and it mostly falls when stocks are rising. Over the course of the first two weeks of June, however, short interest soared even though stocks were rising nicely the bulk of that two-week period. The potential for a short-covering rally is there, but the potential rally doesn't have the usual advantage of getting started after a market lull. If it's to be, it's going to have to rally on top of the strong rally we've already pieced together since early February. And, it's going to have to do it even though the S&P 500 is already priced at a frothy trailing P/E of about 17.6. And the whole thing got me thinking... what if they're right? What if all those folks who are betting against the market here are right, and rather than being "forced to cover their short trades at higher prices", these people are laughing all the way to the bank as most other traders are forced to sell their stocks before they lose any more value? It's not how things usually are. Usually - as was the case in September of 2011 and in June of 2012 - anybody who bet against the market via a short position basically got their head handed to them. Sooner or later though, the exception to the norm materializes and we get a non-contrarian outcome. It would certainly make sense to me if we saw something like that here and now. While there's always some degree of a defiant attitude when people and pundits make a public stand, the table-pounding insistence of the bulls of late is far more intense now than it was in September of 2011 and June of 2012. In those two cases [and I'm basing this on VIX and investor confidence levels around those times], we at least saw a measurable amount of respect for the fact that stocks could tank at anytime without warning. This time around, the so-called gurus are getting downright indignant if you don't blindly heed their advice. Though nowhere nearly as crazy as the attitudes were in 1999 and in 2007, seeing things like Gerard Baker's forecast for the Dow reaching 20,000 and then nobody even batting an eye at it tells me it's time for Mr. Market to remind everyone to take nothing for granted. Of course, it's a song I've been singing for a while now, to no avail. I'm still sticking to my argument though. With a trailing P/E of 17.6, a VIX that can only be described as stupid-low, and a Federal Reserve that has all but confirmed it's going to at least turn one spigot off come October, I have to have faith there are enough people out there recognizing it's time for the stock market to adjust some overly-optimistic attitudes by doling out a little more pain then we've seen in a while. The odd surge in short interest (and the odd way it materialized) is simply another layer of evidence to this end. But hey - that's just me. Whatever the case, the short interest data for the second half of June will be out within the next few days. We'll update the chart then, and we may even make a major decision on stocks based on the data... if it's some kind of crazy number. In the meantime, we still have to contend with the market's short-term ebb and flow. What does Wednesday's bullishness do to our generally-bearish outlook? Honestly, not much. Since we built the core of the current discussion around it yesterday, let's stick with the NASDAQ Composite today to get a feel for where things are going and where they're not going. As expected, the brush with - and subsequent bounce off of - the 20-day moving average line yesterday set up some bullishness today. When I say "some", however, what I mean is an unimpressive degree. Oh, the 0.6% pop was nice, but it didn't come anywhere close to undoing Tuesday's damage. Similarly, and as expected, the VXN ended up peeling back from its ceiling(s) around 14.2. Superficially speaking, it looks like the bulls stopped the bears in their tracks with Wednesday's bullish effort. I'm telling you though, the battle isn't over yet. The sellers bumped into several technical hurdles on Tuesday, and it's going to take more than one day to clear them. Today may prove to be nothing more than a rest period for the bears. The clincher for any more downside action, of course, will be the NASDAQ breaking under the 20-day average line at 4385 and the VXN punching through its resistance at 14.2. The bulls haven't sidestepped anything yet though, and it's not like there was a stunning amount of volume behind today's gains. Action Needed - Dump ANIP If you happen to be in an ANI Pharmaceuticals (ANIP) position because of our May 22nd recommendation, we now recommend you lock in the 18% profit you may have on the trade and get out at your earliest convenience. We'd love to hold out for more, but with an 18% profit to protect, there's more risk in being stubborn than additional reward in being patient. I'd be kidding you and myself if I were to tell you the market's ominous dark clouds don't have a lot to do with the decision to take the money and run with ANI Pharmaceuticals. On the other hand, I don't care. The name of this game is risk-management, playing big hands when the odds are in your favor and playing small hands (or not playing at all) when the deck is stacked against you. Knowing that three out of four stocks move in tandem with the broad market regardless of the underlying company's merits, holding a stock against a brewing bearish tide is still statistically a bad idea. Yeah, we've still got Astec (ASTE), Laclede Group (LG), and Hurco (HURC), and we're holding them each for a particular reason. They're all on the chopping block though, and if the indices do move any deeper underwater, we're going to cut loose pretty quickly. And yet, we still have new names we're adding to the watchlist. Hmmm. They're the oddball, small names that can trade independently of the broad market though. We'll look at some of the better possibilities when the time comes.