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Will Markets Miss Another Shot at a Healthy Correction?


Every time they're ready to break down, they rally instead.

The mutual-fund managers who have lagged in performance will see these next two months as their opportunity to catch up and close the year on a positive note. The bears see it completely opposite. Just as in November 2007, the bears view this "buy the dip" into the seasonally strong period as a bull trap that will suck the very last dollar off the sidelines and into the market. The bears want the last sidelined buyer and "small spec" short sitting on the sidelines before they position for a major drop in the market. The bears believe all big rally days are their opportunity to short, and the next market plunge as their big opportunity to finish their year on a strong note. The bears keep repeating, like a mantra, "cover the dips, short the rallies; remember the November 2007 bull trap." (See October 2007 Shows Us How This Rally Ends.)

"Managers are closing their eyes and plugging their nose and buying."
-- NYSE floor trader

Mutual fund managers "know" stocks are hyped up and unattractively valued. But buying stocks is better than losing their jobs. So managers plugged their nose, closed their eyes, and jumped into the fully invested pool. Mutual fund cash levels are now at the same low levels as in October 2007 -- right before this great bear market began. Here's how the bears see it: With 5-10% gains possible to the upside and five times that (or more) risk to the downside, mutual fund managers are trying to pick up pennies in the middle of a busy highway. These Johnny-come-lately managers need to pick up some extra returns prior to year-end. They figure the risk of potentially getting their shareholders flattened is worth the reward of keeping their jobs.

Short-Term Gain for Long-Term Pain

Meanwhile, Congress and the Federal Reserve think of more ways to temporarily stimulate the weakened economy (see Dear Mr. Bernanke, Try This). The bears call it Washington's "short-term gain for long-term pain" fiscal and monetary strategy. The bears want the government to keep their hands off and let the free market take prices to where they belong -- a painful cleansing process. The bulls are banking on the fact that those in power will do all they can to put the pain off for another day. Market bulls and real estate agents are both praying for a new Cash for Clunkers-like program to slow the real estate depression. The bulls are banking on Washington to prop up overvalued homes and stocks and to implement additional giant stimulus injections to bring the consumer back to life.

Deflation Ravaging the Nation

The bears keep eying the United States' increasing mountain of debt, which is threatening our country's economic security. Worse yet, many believe when the Fed creates its final stimulus package, the lava flow of deflation will begin anew and ravage this great nation. The government will continue to throw money into a black financial hole. The world will watch as the dollars simply evaporate into this hot molten lava flow of deflation. This insanity must stop in Washington before the world wakes up to find that Moody's has either downgraded or placed the debt of the United States on credit watch. For those who think this can't happen, go to the US Debt Clock website and watch for a few quake-in-your-boots minutes.

The Lucy/market bears can feel the ball in their hands, fingers stretched along the laces. They know what's right; they know what they should do. But in their hearts, they're dying to invite the ever-optimistic Charlie Brown/bulls to have a go at it.

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No positions in stocks mentioned.
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