Exceptional Bear II

On Aug 25th we began the final rally back to the top, wave C of an a-b-c wave 2, meaning it’s a correction, rather than a bull move. This "Dead Cat Bounce" which will likely take us back up to at least S&P 1180 as a “false breakout" possibly taking us up slightly above S&P 1220 for new high. Like the sirens in the Odyssey who lured ships to crash on the jagged rocks, so too this move will sucker in the last of the holdouts to get fully invested just before the Crash. Knowing this in advance will allow us to make the most of the move without getting caught in its euphoria.

This market is most like 2008, when we had outstanding performance exceeding 360% for levered accounts and 240% for non-levered retirement accounts. This Market will be likely much swifter and profitable for those holding INVERSE funds, which appreciate as the market tumbles.

Rarely has there been such a deep chasm between perception and reality. We are back to October 2007's Euphoria with the Market 40% overvalued on a Q ratio basis. Market bottoms typically sell at 40% discount to the Q ratio. Since markets swing like a pendulum from overvaluation to undervaluation by a comparable percentage, an 80% plunge is highly likely to include a CRASH. Crashes are sudden mass realizations of reality. If the green shoots of March had been real, we would have had lush foliage by now. Instead we have rising unemployment, mass deleveraging, depressed bank lending, mounting foreclosures, and plunging Real Estate. We keep looking for less bad, rather than improvements in these areas and are setting ourselves up for the Mother of all Crashes.

The Fed's easy money is responsible for risk asset bubbles everywhere, apparent in the dollar's imminent plunge. As the dollar plunges interest rates must shoot up to compensate foreign buyers of our Treasury debt, just as if inflation were gnawing away at purchasing power, while Deflation will be the major threat. Insiders have sold stock in record numbers over the last 8 months - they are rarely wrong. Emerging Markets have not decoupled, they have merely gone temporarily out of phase, and will plunge hard with developed markets. Bonds, which were the star performers of 2008, will be big losers this time as the probability of US default increases with run-away deficits. Only expertly timed INVERSE funds will work in this environment. In 2008 our timer tracked performance for unlevered Pension accounts was in excess of 240%, we expect a similar, faster Market this time.