In my August 18, 2011 market commentary, I wrote the following:

"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. "

* * *

During the past two weeks, the market staged a classic "jam" rally off the lows,
with little leadership to speak of. Such a rally was not surprising given that
the major indices had seen historic selling off their highs. Indeed, the Nasdaq
Composite managed to rally into the 2600 level, which had marked key support for
the index in March and June of this year. Unfortunately, that support level has
now become key resistance, and that index failed its first test of that level
miserably.

The "jam" rally had little, if any, characteristics of a sustained uptrend,
other than a suspect follow-through day on August 23. That follow-through day
lacked clear and unequivocal volume to indicate that institutions were putting
money back to work in the market. In addition, in the days after the
follow-through day the major indices rallied on below-average volume, somewhat
reminiscent of the "jam" rally we saw in late June through July before the sell
off began. Third and most importantly, was the clear lack of leadership and
strong basing patterns in the market.

The few stocks that managed to make new highs recently were mostly illiquid or
defensive-related names, and not the high-quality liquid growth names that are
associated with new market uptrends.

Stocks such as PMST, MAKO, and ARCO are not exactly the type of liquid growth
names that would lead the markets by themselves out of a bear market. While
these stocks could be future leaders down the road -- without other liquid
names showing strength at this time -- they are merely illustrative of the
smaller, illiquid stocks that may buck the trend during a countertrend rally.
This reminds me somewhat of the August 2008 countertrend rally before the
historic market debacle in 2008. As my personal journal entry from August 28,
2008 reads:

"The only stocks I see breaking out or leading now are smaller illiquid names
that do not give me confidence the big money crowd is putting money back to
work. While it is nice to see a name like AVAV or AFAM buck the trend, those
stocks appear to be the exception to the bear market, and not stocks that would
lead us out of this nasty market environment. For this reason, I fear this
rally does not have a long way to go."

* * *

Although I wrote that journal entry three years ago, the fact that I could
simply substitute PSMT, MAKO, or ARCO for AFAM or AVAV, is anything but
inspiring. Again, perhaps these stocks are future leaders, but without other
liquid names making new highs and leading, the rally we saw does not correlate
well with a new sustained market uptrend at this time.

Similar to today, the often-defensive medical space in August 2008 was showing
good relative strength. At that time names like CELG and AMGN were going into
new highs only to eventually get crushed during the great crash in the fall of
2008. Similarly, during the "jam" rally, medical stocks like ATHN, MAKO, and
CERN have shown superior relative strength. Without other groups leading the
charge however, precedent tells us that rotation into the medical area can often
be a sign of a "risk-off" or defensive mindframe for the big money crowd.

Faced with suspect illiquid leadership, rallies led by defensive stocks, and
virtually nonexistent superior basing patterns in growth stocks, the "jam" rally
appeared somewhat suspect from the start. And, late last week, the indices may
have begun to tip their hands, as they turned rather swiftly to the downside
after running into logical resistance.

While our markets were closed for Labor Day, the European markets continued
their sell-offs yesterday, with the major European bourses down anywhere from
3.5-5%, and the major European banks trading to 29-month lows. This certainly
does not bode well for our markets, and coupled with last week's sell-off
certainly leads one to conclude that "jam" rally appears to have ended.

Certainly a retest of the August 8 lows, and another leg down in this bear
market appears likely at this time. For now, the only small positive is that
some of the higher quality liquid names have shown a bit of "stubbornness"
during last week's selling, as stocks like AMZN, PCLN, ISRG, MA, AAPL, BIDU,
and CMG continue to show exceptional relative strength. These "sexy seven"
should be watched carefully as they will offer an important clue as to the
duration and severity of this bear market. Should they come under heavy
distribution and break lows from last month, the odds of a further sell-off
would be increasingly likely.


In summation, faced with the negative environment described above, high levels
of cash and capital preservation remain of high import. Other than gold and
gold miners, being long in this market continues to be a recipe for disaster.
And only the fool will make useless predictions of how long this bear lasts, or
attempt to trade every wiggle and tick on the tape, shorting and going long
almost at random while masking his or her incessant need to always trade.

Just as the best poker players play only a strong hand and know to throw away
weak ones, the skilled speculators understand to only play their strong hands in
the market. And the beauty of investing, is that we never have to ante until we
see the opponent's cards -- in this case -- the cards of mother market.

Remain patient and defensive for it is an absolute certainty that sooner or
later a new bull market will be born. And like every new bull market, most will
miss it as they will be too busy shorting it or refusing to commit capital once
it begins.