"Just in time for the holidays, three of New York City's greatest communities come together in peace, love, and OY."

--Deborah Kass

Thanks for reading my Diary today.

On a personal note, my famous artist sister Debbie today has been immortalized in an installation of her iconic Oy/Yo sculpture in Brooklyn Bridge Park's newly renovated Main Street lawn.

Here is a picture of her sculpture:

Here is the background story!  

I even can't express how proud I am of her; I only wish my parents were alive to see her accomplishments.

Maybe "OY" will replace the "I LOVE NY" logo in the years ahead!

Enjoy the evening -- I know Debbie will!

My thoughts on the day:

• Reasonably important win for the bears today.
• I started the day outlining the likelihood of a retracement on "good news." 
• Approaching some short-term critical support breaks -- to the downside.
• Mr. Market flatlined from noon and had a little kick save at around 330 p.m. ET.
• I wouldn't be surprised if the markets were flattish the next one to two days and "consolidated" their losses.
• The U.S. dollar was a bit weaker, but nothing consequential.
• Bonds closed near to the price lows of the day and highs on yield.
• The 10-year U.S. note yield closed the trading day at 2.35%.
• The three-year U.S. note auction was weak, as discussed in "Bonds Matter."  
• Municipals were flat but closed-end municipal bond funds were hit hard for the second day in a row. I wrote some cautionary remarks on Friday and took off all the funds from my Best Ideas List in "Closing the Book on Closed-End Muni Funds.": 
• The high-yield market got hit and acted like junk.  So did one of my favorites, Blackstone/GSO Strategic Credit Fund (BGB), down 19 cents near the close.
• Crude was better in price, but you couldn't see it by looking at the energy stocks. Schlumberger (SLB) went on my Best Ideas List as a short this morning.
• As I mentioned last Thursday/Friday, I expect A LOT more volatility; I would reduce VAR ("Value at Risk")
• I will stick with my notion on Friday that (T)FANG has posted a near-term top. .
• Banks were lower but not too much, considering the broad-based market decline.
• Here are my bank "buy levels."
• LIfe insurance stocks reversed a lot of Friday's gain; poor relative performance vis a vis banks, and a possible tell for future weakness, even if rates continue to rise.
• Consumer staples lower, as reflected in the Consumer Staples Select Sector SPDR ETF (XLP).
• Retailers=Schmeissburger

I added to a number of individual stock shorts today in a small way, including MetLife (MET), Lincoln National (LNC), Comcast (CMCSA), Exxon Mobil (XOM), Schlumberger (SLB), Berkshire Hathaway (BRK.B) and XLP.

PrShares UltraShort S&P 500 (SDS) is my long "Trade of the Week" and XLP is my short "Trade of the Week."

I continue to believe that the banks will be among the best market sectors over the next one to three years. Here are my buy levels for my favorite, and current, long positions in banking:

• Bank of America (BAC): $16.50 to $16.75
• Citigroup (C): $52.50 to $53.00
• JPMorgan Chase (JPM): $63.00 to $64.00 
• Fifth Third Bancorp (FITB): $19.50 to $19.75
• Southern National Bancorp (SONA): $11.00 to $11.50
• MidSouth Bancorp (MSL): Below $11
• Sterling Bancorp (STL): $16.00 to $16.50

The bond market is getting increased attention from many players given the Federal Reserve's likely December interest-rate liftoff.

The three-year U.S. note's yield was weak at today's U.S. Treasury auction. It came in slightly below the when-issued rate, but the bid-to-cover was awful at 2.82%. That's not only well below the 3.27% average, but the worst print seen in six years. Dealers also received the largest percentage of the auction all year at over 44%.

Market participants seem to be adjusting to the first rate hike since June 2006, although it remains uncertain how Wall Street will react. What's clear is that the rate rise over the last 1-1/2 weeks has been a violent one characterized by a change in sentiment.

CNBC contributor Pete Najarian recently cited bullish call activity in Potash Corp. (POT).

I added to the following individual equity shorts today:

• Berkshire Hathaway (BRK.B)

• Consumer Staples Select Sector SPDR ETF (XLP)

• Comcast (CMCSA)

• Exxon Mobil (XOM)

• Lincoln National Corp. (LNC)

• MetLife (MET)

• Schlumberger (SLB), which I'm moving on to my "Best Short Ideas" list

The latest musings from Sir Arthur Cashin:

"Stocks are re-evaluating just how 'beneficial' a liftoff would really be. Trading slows a bit after very active first hour. If selling were to worsen, bulls would need to defend a key support band at S&P 2072/2076."

Real estate maven Mark Hanson has some interesting input today in his morning commentary:

"This isn't your father's cash-out refi boom -- of little economic benefit relative to refi booms of the past.

A Black Knight Mortgage Monitor report released last month highlighting that 'cash-out refis were up 68% in the second quarter over last year.' I have not stopped receiving e-mails on the subject and what it means for consumer spend.

Over the past month, I have seen this '68% cash-out refi surge' stat cited several times by financial writers, analysts, CEOs and PMs. They refer to it in the context of a healthy, de-levered consumer utilizing the 'wealth effect' -- ready to move to the next level of spending.

All that I can say is that since 2007, taking mortgage and housing headlines at face value or seeking analogues by looking at pre-crash data is a great way to bury yourself.

Remember, in order to create a durable real estate wealth effect with escape velocity that spills over into the macro-economy (the way it did from 2003 to 2008), people have to be able to easily monetize their equity. No matter what everybody else wants to read into the data, this isn't happening -- and with the new mortgage laws in place, it never will.

Heck, the definition of 'cash out' doesn't even mean what it used to in the past. For example, a new mortgage is always considered a 'cash out' (even if the borrower doesn't receive any cash) when it's used  to pay down or off a HELOC that wasn't used to purchase the house. (This situation accounts for the largest share of HELOCs, or "home equity lines of credit.")

Let's say you got a HELOC a year ago to pay for a kitchen update. Your home is now worth more money with a new kitchen, so you refinance the place to combine your first mortgage and HELOC into one new loan.

That new mortgage is now considered a 'cash out' and priced accordingly, even though you didn't put any cash' into your pocket. But in the good old days, a HELOC used for home improvement wouldn't be considered a cash out, allowing for far-more-aggressive rates and underwriting.

As such, based on Black Knight's data, even with second-quarter cash-out-refi volume up 68% year over year:

1) Volume is 80% below the old bubble levels.

2) Volume is no higher than the last time rates plunged to historical lows in 2010 and in mid-2012 through 2013. When rates rose following those periods, cash-out refis plunged back to historical lows.

3) All refinance volume in the latest quarter was up nearly 60% year over year, as rates were much lower than they were a year ago. That makes the cash-out component less of an outlier.

What's Going On?

Why are cash-out refis up so much this time around? Where is the incremental volume is coming from? Well, it's not what you think:

1) All refi volume is clearly tied to rates, which were notably lower this year than in second-quarter 2014. But this year's refi volume peaked in April and is down about 45% since then. Unless analysts think mortgage rates will drop 50 to 75 basis points from here, they'll have to start backing the second quarter refi pop out of their models and quit extrapolating it. Moreover, once rates hit a level that draws in borrowers, a number of factors determine a refi 'boomlet"'s durability -- all of which have been hit with increasingly stiff headwinds as 2015 has ground on.

2) Paying down or off HELOC debt that homeowners already used over the past few years for real estate speculation, car purchases, home upgrades, etc., accounts for the lion's share of cash outs. In other words, the money has already been spent, and the refi will have little benefit to the macro-economy going forward.

3) At 2014's end, 93% of all legacy HELOCs still hadn't started their 'hard-recast' cycle yet. This is a huge problem for millions of homeowners who have been making interest-only payments on their HELOCs for the past 10 years. Their bills can rise 200% and more in a single month when they have to begin repaying principal -- and remain there for 15 years until the loan is paid in full. This will be a huge problem, especially in California.

4) Some people are paying themselves back for down payments on fraudulent second-home purchases that they've made over the past few years. This is happening at levels not seen in 2006. Second-home demand has surged more than any other housing segment over the past three years, and the market's overwhelming opinion is that aging, affluent baby boomers are all rushing in to buy vacation homes at the same time. But this is misguided, as there's no indication that true second-home demand is surging at all. In fact, the data fully support my thesis that this housing market has spun out of control from rampant speculation, process incompetence, relationship-driven dissonance and outright fraud. That's an exact repeat of 2005-07.

It's also important to note that the Black Knight report also indicates nearly 60% of all cash-out-refinance volume is coming from borrowers with unpaid principal balances below $200,000. This means that at an average after-refi loan-to-value ratio of 68%, the bulk of cash-out refis are coming from houses valued below $300,000.

With such a high concentration of cash-out-refi borrowers in California, this cohort certainly isn't made up of higher-income big spenders who will turn their equity into broad-based purchases.

Rather, this is mostly debt consolidation, repayment for money already spent and people trying to avoid default by paying off a HELOC whose monthly bill is ready to explode higher."

I plan to press the following individual shorts this morning on any strength: Berkshire Hathaway (BRK.B), Comcast (CMCSA), Exxon Mobil (XOM) and Schlumberger (SLB).

Here are my "Trades of the Week" for this week:

On the long side, I'm recommending the ProShares UltraShort S&P 500 ETF (SDS), which closed at $19.25 on Friday. I like SDS because I think stocks are overbought. (See today's opener for my overall thoughts on the market.)

On the short side, I like the Consumer Staples Select Sector SPDR ETF (XLP), which had a $49.18 Friday closing price. I think consumer staples are vulnerable to higher interest rates and a strengthening U.S. dollar. See my Friday missive for some additional reasons why I like XLP in today's circumstances.

"Buy at the sound of cannons, sell on the trumpets."

-- Nathan Rothschild

I argued on Friday that the above adage has applicability to the market's near-term prospects.

It certainly would have paid to listen to that old adage back when Wall Street hit its late-September lows, as the rally that followed saw the S&P 500 rise nearly 12%.

The gains were primarily borne out of the bad news that the U.S. economy had created just 144,000 non-farm jobs in September. That, in turn, promoted a "lower-for-longer" premise for U.S. interest rates, with the 10-year Treasury yield falling back to slightly below 2%.

The U.S. dollar was also losing value, while bearish investor sentiment rose to the highest extreme seen in three or four years. (Surveys showed that the number of bearish investors substantially eclipsed bullish ones.) China's growth trajectory was also showing renewed weakness, with the Shanghai Composite index threatening to drop back to 3,000.

Well, last Friday's strong October jobs report has created the opposite effect.

Prospects for a December Federal Reserve rate hike have now risen to the point where they've now become the consensus. Bear-market sentiment has nearly vanished and strategists are revising their bearish targets back upwards.

The 10-year Treasury yield is testing 2.30% -- up by nearly 40 basis points and back to July's highs -- and the dollar has begun to strengthen in the last week or two. The bond market's Relative Strength Index has also moved to a two-year high and is dramatically overbought now. Overseas, China's economy appears to have stabilized and the Shanghai Index is back above 3,500.

The Market's Technical Faults

Improving investor sentiment and runaway markets like what we saw in October are often bullish "tells," but only if there's good new leadership and a broadening advance.

However, those condition don't seem to currently exist. Consider the fact that:

• Narrow large-cap indices like the OEX 100 and Nasdaq 100 look like the "World's Fair," but the broader masses don't.

• The Russell 2000 and NYSE Composite indices have had strong but only partial retracements to the upside, and large supply/resistance lies at current prices.

• The dichotomy between the strong technology sector and weak energy and industrial stocks remains intact. So does the split between strong banks (and selected financials) vs. weak homebuilders, REITs, utilities and consumer staples that seem to be testing recent lows. (Note: I took a short in the Consumer Staples Select Sector SPDR ETF (XLP) on Friday.)

• As the "Divine Ms. M" recently wrote, the number of stocks hitting new 52- week highs isn't expanding.

• While November has historically been the second-best month for stocks over the past decade, equities have typically fallen during the month in those years where the S&P 500 rallied more than 5% in October.

• Bulls are now more than 2x bears in the latest American Association of Individual Investors survey, while the latest Investors Intelligence poll puts bulls at almost 2.4x bears.

• The CBOE 10-day put/call ratio last week penetrated 0.90, its lowest level since June.

• Oil is struggling to stay over $45/barrel.

Tactically, I substantially raised my net short exposure late last week. I personally believe that a tradeable retracement lies ahead in November.

Wharton's Dr. Jeremy Siegel is about to appear on CNBC's Squawk Box.

Here are questions that I passed on to co-hosts Andrew Ross Sorkin and Joe Kernan to ask Siegel:

The consensus estimate for S&P 500 earnings stood at $136 a share 12 months ago, but stands at $110 a share today (as per Goldman Sachs). That's a 20% decline!

With the S&P 500 higher now than a year ago, valuations have risen and price-to-earnings ratios are way up.

For the market to advance from here, don't earnings have to rise materially? It's hard to see P/E ratios expanding in the face of a higher risk-free rate of return. (Interest rates are +40 bps from late September.)

Dr. Siegel, where is the evidence that profits will be robust in 2016?

Doug Kass,

Wharton Class of 1972

Peter Boockvar chimes in on both the bull and bear cases for stocks in this morning's commentary:

"Bull:

1) The Fed is finally on the cusp of getting on with a 25-basis-point rate hike more than six years after the financial emergency ended, and is hopefully putting to rest the paralyzing drama and uncertainty over the first increase.

2) Higher rates will reflect a continued growing economy.

3) Historically speaking, markets continue higher after the first rate hike, and after the next few as well.

4) The pace of rate hikes will be glacial.

5) Earnings growth ex energy is still pretty good, with profit margins still elevated.

6) On a one-year forward earnings estimate, the P/E multiple is reasonable relative to interest rates.

7) Stock buybacks continue apace, as do dividend increases.

8) Lower energy prices put more money into consumers' pockets.

9) The unemployment rate is down to 5% and the U6 is finally below 10%.

10) The U.S. economy's services side is resilient.

11) Employees are finally seeing the green shoots of higher wages, which should lift consumer spending.

12) Auto sales are an economic standout, thanks to cheap credit and longer payment terms.

13) The Bank of Japan and European Central Bank are still printing away.

14) The consequence of a stronger U.S. dollar will help to limit import prices and stretch the dollar's purchasing power even further.

Bear:

1) The second stage of Fed tightening (i.e. a December rate hike) looks like it's about to begin, following Quantitative Easing's end -- which was the first phase of Fed tightening -- one year ago.

2) Asset prices have levitated on QE and the Fed's Zero Interest Rate Policy, but the "Fed put" is moving further out of the money.

3) As measured by the ratios of market capitalization to GDP, median P/E ratio, Shiller P/E, median price to sales and Tobin's Q, the market has only been more expensive once -- in 2000.

4) Profit margins are rolling over. Higher labor costs will be good for Main Street, but not so good for Wall Street.

5) Revenues are decelerating.

6) An earnings recession is here. Don't ex out energy earnings without removing the benefits of lower energy prices for a variety of other industries.

7) Credit spreads are widening and the cost of capital is going higher.

8) We're at the end of the current credit cycle; defaults are going higher.

9) Slower earnings and higher borrowing costs will lead to a slower rate of stock buybacks and dividend increases.

10) The third-longest bull market in Wall Street history is showing signs of wear and tear. Small- and mid-cap stocks badly lag the mega-caps, and the cumulative advance/decline line doesn't confirm the S&P 500's recent runback toward its 2015 high. The Dow Jones Transportation Average is also still 10% below its December 2014 peak.

11) Investors are questioning valuations in the IPO space. For instance, Square is about to price 33% below its last private-funding round.

12) The dollar's strength is a form of financial tightening, as it will further squeeze corporate profits.

13) Low commodity prices reflect a punk global growth picture.

14) U.S. non-farm payroll growth is slowing, as the average this year has been +206k per month vs. +260k in 2014.

15) GDP growth is running at only 2% this year. Trade and capital spending remain soft, and consumers are mostly saving their lower energy expenditures as health care, rents and other costs of living go up.

16) The U.S. economy's industrial side could be in a recession. The ISM manufacturing index is flatlining, and a few CEOs in the space are now using the 'recession.'

17) There's a slowing flow of petro dollars and a shrinkage of central-bank reserves that have both been invested in U.S. assets over the years."

Miller Tabak cuts all REITs to sell this morning.