Saturday, April 18, 2009

The end of the bear market rally

is getting very close. This is is the reason I bailed on my [failed] Gold stock trades. It is time for me to raise capital to go short. Make no mistake about it, this is the biggest bear market that most of us will get to witness during our lifetimes. The next leg down will be wicked and relentless.

Where are we in this bear market - perhaps in the spring of 1931 in the United States (75% losses in the Dow Jones over the next year), the spring of 2001 in Japan (40-50% losses in the Nikkei over the following 2 years) or the spring of 2001 in the U.S. NASDAQ (60% losses over the next 1.5 years)? All I know is that it ain't even close to being over and some devastating losses are in store for even the good companies that weren't responsible for the mess we're in, whether publicly traded or not.

That said, money can be made playing the swings up or down in a bear market. However, the big money for this bear market is still on the short side as the trend is strongly down. A big, grinding leg down is dead ahead. It may start Monday or it may take until May to get going. In either case, I don't think the old adage "sell in May and go away" is going to be wrong this year.

Following are a multitude of data indicating the top is VERY close to being in, starting with the Advance Decline line of the New York Stock Exchange (chart below is a cumulative daily chart of the past 2 years [i.e. the current bear market], this chart calculating the number of advancing/rising stocks minus the number of declining/falling stocks):

Next is an 8 year daily chart plotting the number of stocks in the New York Stock Exchange that are above their 50 day moving averages (8 year chart used to show that we are overbought even for a bull market by this measure right now!):

Below is a 3 year chart of the 24 day moving average line (to smooth out day-to-day volatility in this measure) of the CBOE Options Total Put to Call Ratio ($CPC):

Next is a 2 year chart of the NYSE Summation Index, a measure of breadth:

A 2 year daily chart of the Volatility Index ($VIX) follows:

Finally, here is a chart showing that the Investors Intelligence sentiment survey from last week indicates that there is no longer excessive bearishness and I would assume that this coming week's numbers will indicate an even higher ratio of bulls relative to bears:

The bottom line is that I'm now looking to get short. My favorite candidates are FCX, PCU, WFC and GS. More on individual shorting opportunities later. I will be starting to scale into 2010 LEAP option puts on FCX this week. I think Gold will hold up just fine and any weakness (like now) should be considered a buying opportunity for those who have not fully allocated a portion of their capital to the mightiest form of cash on the planet. Gold stocks, however, are not immune from the coming equity downturn and long-term holders will have their faith/resolve tested over the next 6 months or so.

Wikinvest Wire