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Beware The Bear

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The Burly Bear usually hibernates during the cold Winter, than awakens in the Spring. The Bear markets in stocks are more erratic, although there have predictably been at least one , never more than two of them ( 20% decline or more) per decade since 1900 - a large enough sampling. The two most recent, in the past decade of 2000, were almost 50% each - probably due to electronic neural network trading by computers of institutions and hedge funds.

Nearing the end of the fourth year of this decade, it might be prudent to take steps to hedge against another one, especially in lieu of the recent four+ raging bull market, mostly driven by Fed liquidity and desire to push investors into riskier investment.

Last week's column mentioned the Triple Threat of John Hussman's predictors: 5-year SPX run, Shiller's CAPE p/e level and the Bullish sentiment reading of the Institutions. In this week's Barron's magazine mention was made of the high number - finally- of investors into stocks, after the long bond run - 38% of households are now in stocks, compared to 40.9% in 2007 and 53% (tech stocks) in 2000.

Barron's also featured one of the top technical analysis firms - Ned Davis Research- which concurs with the above warnings, although not as severe. Their expert analysis of 60 years of Bear markets show that if the Bond Yield Curve is not inverted (long bonds over short notes), then the correction is more in the 20% area. In fact, the 4-year Presidential cycle is quite reliable with the 2nd year dipping down 20%, but then rallying up @ 60% right after. This might validate the "Sell in May" theme, with the catharsis on October - Fiscal year, elections, etc.

In my view, since history does not repeat exactly, this might be understated, what with the record Debt and sugar-high liquidity, couple with the aforementioned artificial intelligence trading, even going back to 1987's "What Can Possibly Go Wrong?"

Bernanke's theoretical QE plan might work on paper, but Economics is Rational - Stock Markets are Irrational!

For the second week in a row, the Advance/Decline was negative - much more than the prior week. Most extreme was the Insider Selling Volume - HUGE- and the ratio was 75 to 1 over Buyers. This is not as great an indicator, since it comingles 10% stock holders along with the Board members and Officers- the latter being the most informed. Still...

The McClellan oscillator, near the minus 50 level, at -38, could have foretold the nice Monday rally, but no more than that.

Finally, the Investors Intelligence Bull/Bear (mentioned above in the Triple Threat) actually expanded even more. To see all numbers, go to:


The San Francisco Bay Area Options Group is holding its annual Holiday Season party this Saturday, Dec.21, at Fort Mason - 9 a.m. Bldg C. Members and guests are invited!



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