After over a two-year run, the bull market for stocks appears to have ended. As
I wrote on June 13, 2011:

"The operative question remains whether this is a mere correction or whether the
market is forecasting a significant slowdown in the economy and we are seeing
the beginning of the end for the 2009-11 bull market. While it is still a bit
premature to say, the continued breakdown in the former leaders from late stage
bases, the lack of leadership in any market sectors, high levels of distribution
in the tape with the inability to stage even small rallies thus far, and the
historical context of financial panics and bull markets that ensue (more on this
in my next market commentary) lead me to conclude that a new bear market could
be in its very early stages of forming.

Markets generally do not go straight down, and history shows us that our biggest
up days occur during bear phases. Therefore, even if we are entering a new bear
market, there will be numerous countertrend rallies, and big up days to suck in
those eager to believe the correction is over. Whatever course the market takes
(correction or bear market), high levels of cash until the market
follows-through and bases rebuild remain the place to be."

* * * *

In July we were treated to one of those countertrend rallies I described above,
albeit on low volume. I noted in a comment that some leaders were attempting
breakouts from bases, but the rally quickly failed later that month, and proved
to be nothing more than "a last gasp for air" for the bull market.

Since that time, the market has treated us to historic levels of distribution.
The major indices have quickly dropped approximately twenty percent with the
market showing very little ability to stage any rallies on meaningful volume.
What little leadership remained during the past week has gone by the wayside
such as former leaders PCLN, AMZN, BIDU, LULU, CMG, WYNN, DECK, FOSL, GMCR, CRM
and SODA. Other former leaders that topped out weeks or months ago have
continued to see incessant distribution such as APKT, PNRA, NFLX, ISRG, RVBD,
TZOO, OPEN, and TIF.

Simply put, we are in a bear market for stocks. This means that maintaining
high levels of cash and preserving capital are key. A few important points:

1) The Biggest Rallies Occur During Bear Markets: These rallies merely serve to
relieve oversold conditions and to suck people back in the market. Keep this in
mind. Until the market follows-through and fresh bases and leadership set up,
all rallies should be treated as mere bear market rallies. Time will be needed
for the market to set up for a new bull, and we are likely to head lower before
this occurs.
2) Ignore the Pundits: The pundits and prognosticators in the media never
change their tone during bear markets. Whether it was the dot com bust and
eighty percent drop in the NASDAQ from 2000-02, or the financial panic in
2007-2008, we hear the same thing nonsense every bear market: "Stay Invested",
"Buy the Dip", "The Market is Oversold", "Stay the Course", "The selling is
overdone", "The market is overreacting", or "Stocks are Cheap". Heeding the
advice of these people will do nothing more than cause severe looses in your
portfolios. The simple fact is this: Nobody knows how far or how deep this
bear market can go. Until a new bull is born, stocks can go lower, stocks can
get cheaper, the market can get more oversold, and the selling can get more
overdone.

3) The Difference Between an Intermediate Correction and a Bear Market: The key
characteristic of a bear market is that almost all of the former leading stocks
will top out and break down, as opposed to intermediate corrections where many
leaders will stay above key longer-term moving averages such as the 150-day or
200-day moving averages. During last summer's intermediate correction for
example, many leaders stayed above these longer-term moving averages, such as
BIDU, AAPL, CRM, OPEN, RVBD, VMW, NFLX, FOSL, and CMG. Juxtapose today's market
environment where almost every former leader has broken these key moving
averages on heavy volume. Faced with this indisputable evidence, odds favor we
are in a new bear market for stocks

4) The Obvious Good News: Every major bear market has led to a new bull market.
Bear markets get rid of the excess, froth and speculation of the prior bull and
allow new leading stocks the time to base out and set up for their future runs.
As long as one preserves his capital and stays out of the way of mother market's
wrath, he will have the opportunity to make a king's random once the new bull
market begins. Unfortunately, the average investor is so devastated by the bear
market preceding that point, that he wants absolutely nothing to do with stocks
and misses the bountiful opportunities accompanying the new bull.

5) Exercise Patience During a Bear Market: This is something I constantly
remind myself of as it is the key to investment success. I wrote the following
in December 2008 and it is extremely relevant today:


A quick note on a topic I address now and again which I consider highly relevant
at this time. It is the virtue of patience and not overtrading. Throughout
this year, I have watched as many colleagues have tried to catch a market bottom
only to lose more money then they had to if they simply waited for a
follow-through day and waited for bases to build and breakouts to occur. It was
their lack of patience, not their lack of trading intelligence that caused these
losses. I know many extremely talented traders who are always in the market,
every single day, taking unnecessary risk because they somehow "feel" the need
to trade everyday. Without exception, this incessant need to always trade leads
to a lackluster performance and can be an extremely costly mistake that often
can be the undoing of a trader. Especially in a market as volatile as this, it
is of crucial importance to maintain discipline and not to overtrade and to be a
slave to every tick. All of the great traders I have studied, such as William
O'Neil, Nicholas Darvas, Bernard Baruch, and Jesse Livermore understood that a
large part of a successful trader's career is spent out of the market waiting
for the fat pitch, and not swinging at anything but "their" pitch. These
individuals, who all had decades of success in the market, understood this fact,
and it is what kept them consistently successful in their trading careers.

I challenge all of my readers to review their portfolios over the past year and
to ascertain how much money they could have saved by not overtrading and by
being more patient and waiting for the right opportunities. Such a portfolio
review, with an eye to eliminate needless trading, is an exercise I always find
very beneficial.

When a new bull is born, there will be new leaders that breakout and rally 250
percent or more very quickly. At a time like that, margin and aggressiveness
can reap big rewards. But, the prudent disciplined trader will await that time
and not expose capital to unnecessary risks trying to capture short term profits
on each tick.

I leave you with some words of wisdom on this topic. If you have any questions
or comments please email me. I will have a report later this week that
discusses the rally and any leadership that may develop in the coming days. For
now, I remain fully cash.


The best speculators search only for the very best opportunities. To be truly
successful, you must wait for the right opportunities to present themselves and
this often means doing nothing for long periods of time.

Nicholas Darvas

I have been in the speculative game ever since I was fourteen. It is all I have
ever done. I think I know what I am talking about. And the conclusion that I
have reached after nearly thirty years of constant trading, both on a shoestring
and with millions of dollars back of me, is this: A man may beat a stock or a
group at a certain time, but no man living can beat the stock market .... A man
may make money out of individual deals in cotton or grain, but no man can beat
the cotton market or the grain market .... "If I knew how to make these
statements stronger or more emphatic I certainly would. It does not make any
difference what anybody says to the contrary. I know I am right in saying these
are incontrovertible statements.

Jesse Livermore


The virtue of patience in trading is often overlooked as a key success factor.
Without patience, a trader may have the tendency to trade when he or she
shouldn't. Instead of waiting for the best trading set-ups, the trader would
take extra unnecessary risk by trading when not all the factors are in their
favor. Worse, this bad habit is compounded by the uncertain nature of the
markets. Some of these hastily taken trades sometimes do make profits, and do
make profits big. This reinforces the belief of the trader that he or she has
done the right thing. On those trades that lose, the trader can deceive himself
that, "It's ok, losing is part of the game. I'll win more than I lose.

Author Unknown