Until Housing Improves, Don't Expect Stocks to Rebound

7/25 - "Now, the tens of readers who have followed this blog over the past few years might have the impression that I am a perma-bear, given my general negative tone since I began writing Running of the Bulls. I am a cynic and skeptic - how could you not be when you work in the financial services industry? - but I do not live in a perpetual state waiting for imminent doom."

"I have been structurally bearish on the market for the past decade but have taken opportunities on the long side when presented. I think one of those opportunities is now. I have eliminated my remaining small short position in REITs through the sale of the ProShares UltraShort Real Estate ETF, ticker SRS, and have been buying the ProShares Ultra S&P500 ETF, ticker SSO. I do believe we are in a bear market, and will be in one for a while, thus this is a trade and I have placed tight stops under my SSO long in case I am wrong. The bearishness in the market is so overwhelming and seemingly so obvious that a move to the upside is what would be the greatest surprise to most investors, in my opinion.

It goes without saying that you should not do what I do. Assume that I am wrong. Instead, make your own decisions based on your own analysis, not the opinions of an anonymous blogger."

"I think that we are at least half way through this cyclical bear market - which started either with the top in October or the first violent downdraft in March of last year - in terms of return. In terms of time, I think the ultimate bottom will occur next year."

7/27 - "Another part of bottoming is seeing an increase in the funds being put to work in the stock market. That is the function of the money flow indicator, which tracks the dollar volume entering or exiting stocks on a daily basis. It does this by tracking every single market transaction in every stock, adding the dollar volume (price times volume) to a cumulative total if the transaction occurs on an uptick and subtracting it from the total if the transaction occurs on a downtick."

"Note how selling dried up from January through March prior to the market's bounce higher and how selling also dried up from the latter part of May through early July prior to recent market bounce. I've found this to be a common pattern: a decrease in buying or selling prior to an intermediate-term market reversal.

Still, a waning of selling is different from an influx of buying. When the market bounced after the March low--and now during the market's recent bounce--we have not sustained days in which dollar inflows have exceeded outflows...This suggests to me that much of the bounce consists of short covering and asset reallocation, not necessarily fresh funds being put to work in equities. As much as I've been impressed with the resilience of many stock market sectors and styles, I will need to see more evidence of positive flows before concluding that we are out of bearish woods."

7/28 - "In a turn that no one could have expected, the banking community is in such a tight credit fix that even companies with near-perfect credit cannot get loans...Bank credit is now declining at an annualized pace of more than 6 percent. The Times calculates "That is a drop of nearly $150 billion, an amount much larger than the value of the tax rebates the government has sent to households this year in an effort to spur economic activity."

"The news further calls into question the actions of the Fed which has given hundreds of billions of dollars in cheap loans to major backs and cut interest rates to make it easier for them to borrow. As it turns out, virtually none of this is making it back out of the banks in the form of corporate loans.

The domino effect could be tremendous, and economically dangerous. A lack of funds to credit-worthy business will almost certainly shut down expansion and capital spending."

7/25 - "In a bull market, everyone ignores the greed and fraud that running rampant. No one wants to take away the spiked punch, even after it is perfectly clear that everyone is drunk. The party continues long after any reasonable person might have expected the party to end. Eventually the party goers all pass out on the floor and the pool of greater fools exhausts itself.

In a bear market, there are more distinct, readily observable phases.

Ten Bear Market Phases

1. A huge buy the dip mentality sets in during the initial decline. Most party goes cannot fathom that party has ended.
2. Moderate concern sets in when buy the dip stops working.
3. Initial panic.
4. Numerous bottom calls are made, all wrong.
5. Search for the guilty.
6. Punishment of the innocent.
7. More panic.
8. Lawsuits fly.
9. Regulatory power is given to those most responsible for spiking the punch bowl.
10. Congress gets in the act and makes things worse

Steps 4-10 are repetitive, may overlap, and may occur in any order during repetition. Certainly there have been numerous bottom calls for months now, but each rally has failed."