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April 12, 2008

Where is the Bear Market?

It has been a year since my last blog post. There are rusty creaks emanating from my blogocampus, that little known section of the brain that controls blogging functions. As I peck away at my keyboard and the words creep out, I get a heavy sensation behind my eyeballs, not unlike the feeling that accompanies caffeine withdrawal. For some reason, activation of the blogocampus also makes my head itch, and I scratch thoughtfully. Well, here goes...

Returning readers will remember the distinctly bearish prognostications posted here on a nearly daily basis. While it took considerably longer than anticipated, all the factors presented as reasons why the U.S. would experience a nasty bear market are rapidly unfolding. The housing market is in shambles. Derivatives markets are in chaos because no one can price anything. Consumers have zipped their wallets. Credit markets are drier than Death Valley.

So where is the bear market? Sure, the SPX is 15% off its high, but look at the circled area in the chart below and tell me it doesn't look like a massive reversal pattern:

SPX graph

The March lows also coincided with extreme readings in indicators such as the number of stocks below their 200DMA, Bullish Percent Index, Put/Call ratio, and NYSE TICK... readings that have nearly always coincided with significant lows. Yes, stocks were off nearly 3% last week, but weekly volume was paltry... the lowest its been in over two months. I just don't trust this decline to be the beginning of another down leg. It seems more likely to be a big head fake for bears. If the market were to show us another decline on significantly higher volume, I might change my mind, but my best guess right now is for higher stock prices.

So, what happened? How could the market shake off the biggest credit crisis in 70 years with a decline that is barely more disturbing than a routine correction? The answer, I believe, lies in the actions of the Fed and Uncle Ben's propensity to print . His tendencies are no doubt exacerbated by the fact we are in an election year. If we have, indeed, seen a pre-election low... if the Fed has, indeed, pumped so many dollars into the system as to prevent its natural cleansing... then a post-election bear market is likely to ensue that will be nastier than what transpired in the 2001-02 cycle. Such a bear market will occur because the Fed will either change its stance to one of inflation-fighting after the elections (not too likely) or because they will have lost the last bit of control they may have over credit expansion... much like 01-02, except with more malfeasances to unwind.

This technical view on equities puts me in a quandary. I am still bearish on the economy. Things will get much worse before they get better, and so I cannot back up this technical read with a long side bet. Likewise, despite my bearishness, the technical view prevents me from shorting. I have therefore restricted my SPX bets to day trading. I will take a long or short position for a swing whenever I think I have an edge, but overnight positions are taboo. Besides, with the Fed printing like mad... and now convincing the Bank of England and ECB to follow suit... the easier money is to be had by owning commodities. I'll discuss the commodity theme in my next post.


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