Patience...

Richard Russell is about a million years old and he says over and over again that great bull markets start when valuations reach extreme levels. That bit of knowledge along with your own research into historical valuations will make it crystal clear when great value is upon us in the stock market. We are still far from it...patience...it won't come in a day or a week or even a year, great value will build and build and build and from the period of overvaluation that we have seen for some three decades now it will take at least a decade of the stock market being undervalued before it is ready to take off in a new secular bull market.

--Fred

Annualized Stock Market Returns Based on PE Ratios

An excellent post by Mish with some fantastic data on annualized stock market returns based on Price/Earnings ratios.

http://globaleconomicanalysis.blogspot.com/2011/02/negative-annualized-stock-market.html

What's really scary is that pe ratios have yet to drop below the historic average of 15 since 1987, at least not for an entire year. If I combine that bit of knowledge with the incredible debt of our nation and an ever worsening demographic I can only come to the conclusion that bad times are ahead and they will either be REAL bad or they will last for a long, long time. Likely it's a bit of both.

We have and continue to live beyond our means. I not only see this in the data but in the people that I speak to on a daily basis. I believe we have hard times ahead as a nation, but as Mish points out, when it happens is impossible to predict. I will continue to take stabs at shorting the market but mainly I think the prudent position is to save for the proverbial rainy day and be prepared to invest heavily on the long side in about 15 years. I base that time frame on demographics and my knowledge of Generational Dynamics and the Fourth Turning.

--Fred

No Change

I am 100% short despite the slight breakthrough above the 11,782 level. I'll have to see a stronger move above to exit this position as there are too many indicators flashing bright red warning signals.

--Fred

The Top or Just a Stop?

The time is here to tell whether or not the DJIA will hold at 11,782 or take off for higher levels.

I added to my short position - SDS - today and will add more if the market falls from here and will sell half if the stock market looks like it's going to close higher tomorrow. I'll also be looking to take a position in VXX if the fall looks to be at all violent.

The extreme bullish sentiment and possibility that we may close above 11,782 and then turn south will keep me from taking a long position.

The market knows....

--Fred

December 27 2010 Stock Market Update

I realized that I had failed to post that I had closed out my short position from mid-December with a small loss. Did that about a week ago but with the extreme sentiment readings once again elevated I have again taken a short position.

This is the perfect bear market setup: bulls are now investing their egoes in a climbing stock market and will likely buy into any dips for some time. We will know the market is ready to bounce a bit when they become angry and start blaming shorts for bringing the market down, which means they have finally exited their positions.

I consider a possibilty of the bull run extending from here but it will take a clear breakout above 11,782 for me to get behind that. Remember, I called the upside out of the March 2009 lows at 11,000 as early as April of that year. If that call was more than just luck the secular bear market should kick back in to the downside and begin to frustrate the bulls just as the past 20 months has frustrated the bears.

This is what secular bear markets do.

--Fred

Patience...

Once again I remind myself that patience is a virtue. The financial community is talking themselves into a higher market but only the market will tell us if that will happen.

I predict that the market will fail to break through the important 11,782 level, to any great extent, and will then proceed to eat away at bullish sentiment over the course of 2011 with completely unexpected action that will keep people hopeful and in the market, waiting for the next big up move. The rally out of the March 2009 lows was just a big setup that will be the cause of much more wealth destroyed than created. That's what secular bear markets do.

Should the stock market break through I will certainly revise my outlook. For now it continues to eat away at the confidence of bears and only those who fully understand history, what a secular bear market is, and how massive this one is, will be able to profit.

--Fred

Inflection Point Opportunity

AT this point we are approaching a point of what I consider extreme resistance but with little support and I have taken a short position via SDS.

The resistance comes from the August 2008 high of 11,782 on the DJIA. All gaps have been closed at this point and market sentiment is at extreme levels so the opportunity here is great. A close above the 11,782 level would almost certainly cause me to cover this position.

--Fred