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Is it Time to Abandon the Bearish Outlook?

They say that the first step in overcoming an addiction is to admit the problem and eliminate the denial component.

Ok, here it is: 'I am a bear! Am I cured now?'

'Not quite. Explain to me, what moved you to become a bear?'

Oh my, where to start. There is so much that went wrong and so much that can still go wrong.

Anytime the Dow Jones rallies more than 75% in a one-year span is concerning. I think the last time this happened was in the 1930s.

Reasons for denial

I'd like to be a bull, but being a bull would have gotten me burned three times already in the past decade. In 2000 it was a bursting tech bubble (NYSEArca: XLK). In 2006 it was a tumbling real estate (NYSEArca: IYR) market and in 2007 it was the financial spill (NYSEArca: XLF) that flooded the system.

Being a bear wasn't wrong back than. And today it feels just like 2000 and 2007 all over again. Ok, there are a few major differences.

Unemployment is higher today, much higher. For much of 2000, the unemployment rate was below 4%. For all of 2007, unemployment was below 5%. Today, unemployment is around 10%.

It's not just the cold hard unemployment numbers that concern me, it's the negative feedback loop created by a lack of jobs. Jobs are money. Without jobs there is no money, without money there is no economy.

Without consumers willing to spend, there is also no real estate recovery. If there is no real estate (NYSEArca: ICF) recovery, how will banks (NYSEArca: KBE) deal with all the toxic assets on their balance sheets? Yes, for right now banks have been able to hide bad assets with accounting tricks, but how long can the inevitable be postponed?

It seems like nobody really cares that the FDIC has already shut more than 130 banks, mostly regional banks (NYSEArca: IAT), and three of the biggest whole sale credit unions this year.

Don't worry, be happy

'Well Mr. Maierhofer, you shouldn't worry about all this, nobody else does. Mr. Bernanke and his team are taking care of matters. You just have to trust them.'

'You mean trust ' them' like in 2000 or 2007 or even in the late 1920s.'

'No, this time it's different.'

'Isn't that what you bulls say every time before the market crashes? It seems to be different every time, yet the outcome is the same - investors get hurt.'

'No, this time it's really different. Haven't you looked at the government deficit? It's at an all-time high, which means the Fed is doing everything they can, even more than in the past. Even last Friday's dismal jobs report was good news, because it brought us one step closer to another round of quantitative easing (QE).'

'Sorry, I forgot, bad news is good news because it translates into more government meddling. If QE works, why do we need a second round of it?

Abandon common sense

'As I told you - don't worry about that. People think more QE will do the trick, that's all that matters. Look at prices, they are going up, whether you are a bear or not.'

'I can see that, but ...'

'Shush, nobody wants to listen. Nobody does listen. We are in a bull market, just face it. That's why stocks have been rallying for three months along with bonds, gold , silver and commodities.'

'Yes, doesn't that strike you as odd? Stocks and bonds rallying at the same time. What happened to the inverse correlation between those two usually diametrically opposed asset classes? What about oil? Oil prices have moved up more than 20% Isn't that bad for the economy? The last time oil and bonds rallied with stocks was in 2007 and early 2010.'

'I can see you are pretty set on being a bear. Have you always felt this way?'

'No, in fact I was one of the first to say BUY in March 2009. Via the March 2nd Trend Change Alert, the ETF Profit Strategy Newsletter issued a strong buy signal and predicted the biggest rally since the October 2007 all-time highs. We gave Dow (NYSEArca: DIA) 10,000 as upper target range. I was bullish when nobody else was. Now it seems like I'm bearish again when nobody else is.

History, does it matter anymore?

It's lonely and tough being a bear. Who likes to swim against the stream when it's so much easier to float downstream? But historically, a near unanimous consent that stocks will move higher usually results in a move lower.

We saw this play out in April 2010 when optimism and confidence in higher prices were running at fever pitch. On April 16, the ETF Profit Strategy Newsletter noted that: 'The message conveyed by the composite bullishness is unmistakably bearish. The pieces are in place for a major decline.' Following the April 26 peak, stocks declined some 20% within a matter of weeks.

The problem with foregone conclusions - such as a break above the April highs - is that they usually fail to materialize.

Won't Quantitative Easing Lift Stocks?

Quantitative Easing (QE) has not only become the new buzzword, it's also become the new (and only?) hope to catapult stock prices higher. We know it doesn't do much for the economy, otherwise why would we need a second round of QE?

Seasoned investors have seen time and again that buying the rumor and selling the news has been a winning strategy. The rumor of Q2 has certainly been fertile soil for stocks, but what about the actual news?

With the dollar reaching extremely oversold territory and the stock, gold (NYSEArca: GLD), silver (NYSEArca: SLV) and bond (NYSEArca: AGG) rally over-extended, it certainly wouldn't take much to reverse directions. Initially, such a reversal would be viewed as just a correction, but what if the correction lasts longer than expected. Would it create a new feedback loop of panic and lower prices?

Technically speaking, the uptrend from the July 2010 lows remains intact, but it is showing waning upside momentum and overbought conditions. Additionally, as long as the April 26 highs are not taken out, stocks remain in a larger degree downtrend.

QE2 - vs the Market

Will QE2 be enough to give the bull enough strength to win the tug of war with the bear? Most indicators favor the bearish scenario but there's the old adage 'don't fight the Fed.' At what time should bears fold and stop fighting the Fed's money spigot?

The ETF Profit Strategy Newsletter outlines the safety level, that when broken would point towards higher prices. More importantly though, it analyzes the big picture based on valuations and other powerful market forces.

Japan has had dozens of stimulus packages and QE, but the Nikkei remains in a bear market. A look at the Nikkei (chart above) shows that being on the right side of the long-term trade is much smarter than trying to time bouts of rising prices.

The ETF Profit Strategy Newsletter includes a target level for the ultimate market bottom along with short, mid and long-term forecasts.

Who knows, denial might not be such a bad thing after all.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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