We’re in the home stretch of 2010. The favorite, Weak
Recovery, is ahead by a nose. QE2 and Falling Dollar are right behind. Toxic
Asset and Solid Earnings have been unable to mount a charge.

But two horses — Man ‘o Trade War and Europe’s Problem —
are moving on the outside and could decide the race.

There are so many conflicting catalysts, sometimes it seems
as though you have to pick your horse, place your bet and see what
happens.

I’m sure plenty of
Congress-persons are pretty proud of themselves for moving a bill that would
label China currency manipulators through the House.

But let’s not kid ourselves: this particular strategy for
standing up to China is both reckless and hypocritical.

It’s reckless because it demands action from China on the
yuan.

It’s hypocritical because we don’t act when the ECB
intervened in the currency market to weaken the euro. And we don’t cry when
Bernanke buys Treasuries to lower interest rates and the U.S. dollar.

(OK, so maybe some investors aren’t happy with the Fed, but
stocks have certainly responded to the Fed.)
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I’m no apologist for China. There are serious trade issues
with China – Like intellectual property and patent piracy. Then there’s the
playing field in China that overtly favors state-run enterprises. And the
recent move by China to restrict exports of rare earth elements is a WTO
violation.

These are the angles from which we should be attacking the
China fair trade issue. Congress is pandering to its constituents when it
plays the currency manipulator card.

Does anyone really
believe a stronger yuan is the cure-all for the U.S. manufacturing sector?
And does anyone think a trade war with China is anything other than the
single fastest way to return to recession and push the unemployment rate to
15%?

The real fix is for Americans to take care of business at
home. And it would probably be wise to make it more difficult for companies
to move operations to China.

Ultimately, a trade war would hurt China worse than the U.S.
anyway. China does not have the mature consumer market that the U.S. does. If
its export economy dried up, it would be absolutely devastating for
China.

Alright, I’ve spoken my mind on China for today. Let’s get back to the stock
market…

I said yesterday that we should be expecting a pretty sharp
move lower for stock on either the last day of the third quarter (yesterday)
or the first day of Q4 (today).

I’m sure we could consider the 200-point swing from highs to
lows yesterday a pretty sharp drop. (Though I will say I was pretty impressed
with the rebound.)

And the reason for the declines has nothing to do with the
economic data that came out. It had everything to do with the institutional
investors.

Mutual funds, hedge funds, pension funds and the rest of the
institutional crowd have not been making a lot of money this year. Massive
investor redemptions aside, volatility has made profits difficult. So after a
nice rally to end the quarter, it should be no surprise that funds wanted to
lock in some gains. They pretty much had to.

And I don’t think they’re done. Even if stocks don’t reverse
to the upside today, I expect we’ll see a strong rally in the next day or
two. The Fed is giving the green light to buy stocks and most institutions
will not fight the Fed.

Interesting note
from the financials: they led the rally in early September, then lagged the
rest of the month. But yesterday, the financials showed relative
strength.

It would be fitting for financial stocks to resume a
leadership, especially if this rally is to continue.

Keep an eye on Citigroup (NYSE:C). The Treasury just
finished selling around 1.5 billion shares. It will take a break until
Citigroup reports earnings on October 18. That could give the stock some
upside.

I suggested a position in Citi ahead of last quarter’s
earnings. The stock ran from $3.80 to as high as $4.50 on July 13, three days
before it reported. A similar 18% run would push it to $4.60 over the next
two weeks.

Bank of America (NYSE:BAC) also made a nice run ahead of
earnings.

Speaking of earnings, just a reminder that 3Q reports start a week from today with
Alcoa (NYSE:AA). My Wyatt
Investment Research
colleague Jason Cimpl, head honcho at TradeMaster Daily Stock
Alerts
,
thinks yesterday’s
surprisingly strong Chicago PMI regional manufacturing survey bodes well for
a good earnings report from Alcoa.

Finally, I’d be
remiss if I didn’t note the huge jump for oil prices yesterday. Oil closed
just below $80 a barrel, but spent most of the day above that level. Oil is
now at a 7-week high.

Oil is an excellent gauge of economic growth expectations.
Despite a seemingly conflicting message from stocks yesterday, oil’s message
was pretty clear cut.

Published by Wyatt Investment Research at