Your photo looks like it's in by-pass mode right now. The bottom valve is turned off (perpendicular to the pipe) - cold "in". The one on the side is parallel to the pipe (open). So the cold water can no longer go into the bottom of the tank, and has to go up (past) the water heater.
The problem I see with this configuration though? There needs to be a cut-off from the hot-out (top pipe). If there is a check-valve in the line (top out - hot pipe), then you are all set. If there is none, the "pink stuff" will back feed into the water heater through the top.
Before pumping the pink, and before doing any plumbing, make sure the water heater is drained completely and leave the plug out. Then, with the valves in this configuration, turn the water pump on. If water begins to pour out the water heater drain plug hole, you know there is no in-line check valve on the hot-out pipe. You'll need to add a valve so the water will not back-feed into the tank.
Try with water first, then if nothing comes out of the water heater drain hole, you know your good. Put the drain plug (anode rode??) back in for the winter and you're good to go.