"Most of the change we think we see in life is due to truths being in and out of favor." --Robert Lee Frost

BUSTING HEDGE FUNDS (December 17, 2023): I had worked at Thomson Reuters for 16-1/2 years; the person sitting next to me had the responsibility of tracking hedge funds and reporting on their behavior. After doing this job for a couple of decades, he pointed out to me how the vast majority of hedge funds which had shown little correlation in their investing behavior through the early 1990s had become increasingly alike by the second decade of this century. The proliferation of hedge-fund conferences where they discussed their "best ideas," combined with nearly identical computer algorithms and momentum strategies becoming increasingly much more popular, almost totally displaced former tendencies toward value investing and identifying compelling bargains.

Although there remain key exceptions including money managed by Seth Klarman, Marc Faber, Jim Rogers, Howard Marks, Ray Dalio, and some others where it is unlikely that you will be able to have them handle your accounts, more than 90% of hedge funds are crowding into identical concepts at any given time. This herd following is especially prevalent at key extremes and has almost certainly caused many of those extremes to become much more exaggerated than they would have been if they hadn't existed. It is also increasingly the case that hedge funds as a group are doing almost exactly the opposite of top corporate insiders and commercials. Thus, tracking insider behavior and the traders' commitments has demonstrated repeated multi-decade extremes where the insiders and commercials are heavily on one side while hedge funds have been piling even more aggressively the other way.

Doing the same as insiders and commercials and the opposite of hedge funds has become an increasingly available and profitable investing strategy which I have been doing more consistently as the 21st century has progressed.

As a result, the most consistently successful strategy in the 21st century has been to do whatever the insiders and commercials are doing at any rare extreme, while going against the hedge funds. During the past year we have already seen several examples of this behavior with hedge funds establishing an all-time record short position in U.S. Treasuries in October 2023. This was followed by the biggest Treasury rally in four decades which intensified during the past week as hedge funds rushed to close out their shorts ahead of all the other hedge funds, and were not particularly successful in doing so. TLT had traded at 81.92 in the pre-market session on October 23, 2022, and less than two months later was trading above 99.

Hedge funds piling into the AI bubble is their latest extremely overcrowded trade, while the top corporate insiders of these companies have done all-time record selling of their shares.

The latest overcrowding by hedge funds has been in being long AI stocks. While most U.S. and global stocks and their funds including IWM have been in bear markets since they had topped out in November 2021, funds which are concentrated in the biggest and most popular megacaps which have generated the most investor excitement in this year's AI bubble have dramatically outperformed in spite of their unimpressive profit growth. QQQ has almost regained its all-time top, while XLK and SMH are among those funds which have experienced the greatest percentage gains during the past year and have achieved new record highs. The top insiders of these companies have never sold more aggressively than they have done during the past few years, while the only time hedge funds had been more committed to any concept was when they had been massively short U.S. Treasuries in October 2023.

This chart, just updated, highlights the amazing recent overcrowding by hedge funds into QQQ and Nasdaq 100 futures which has achieved an overwhelmingly lopsided extreme by a large factor even when compared with 2021 or 2022:

Less historically extreme but still massive overcrowding has created other 2023 situations ripe for busting.

Hedge funds, as is evidenced by the official exchange data at cftc.gov, had never demonstrated a higher ratio of shorts to longs for palladium, thereby leading to PALL plummeting to 85.25 at 12:06 p.m. on December 5, 2023. Since then it has rebounded above 100. Hedge funds piled massively into gold on Sunday evening, December 3, 2023 to reach a spot price of 2137.50 U.S. dollars per troy ounce for the first time in history. Given how hedge fund crowding leads to huge reversals, gold bullion is likely to drop to around 1750 during the next several months before enjoying its next strong rally. The traders' commitments for gold as of December 5, 2023 showed commercials (who are those that own physical gold, such as miners, jewelers, and fabricators) long 103,193 contracts and short 330,138 which is more than 3:1 short to long. Not surprisingly, almost all of those on the other side of this trade were hedge funds and related managed money organizations which the commodity exchange calls "large speculators."

Silver's commitments the same week showed commercials long 40,974 and short 92,988 which was clearly also bearish for silver. Hedge funds were thus aggressively long gold and silver and even more aggressively short palladium. Palladium commercials that week were long 12,814 and short 1,537 which is more than 8:1 long to short.

Hedge funds had done all-time record crowding into shorting the Japanese yen, enabling the yen to fall to its lowest point since July-August 1990. Since then the yen, which trades as an exchange-traded fund via FXY, has experienced its strongest short-term rebound since the Bretton Woods agreement was terminated over a half century ago.

Hedge funds formed a lesser bubble by massively overcrowding into energy commodities and their shares two months ago.

Several times since November 2022 including around the middle of September 2023, hedge funds massively crowded into anything relating to energy while energy insiders sold shares at their most intense pace ever recorded. This was an especially notable reversal for top energy executives who in 2020 were their most aggressive in buying their own shares in their entire history. Starting on September 14, 2023, when XLE reached an all-time dividend-adjusted zenith of 93.685, energy shares and their funds including XLE have been among the biggest losers of all unleveraged exchange-traded funds in any sector.

The media often encourage ordinary investors to do as the hedge funds are doing, which is not surprising since they get a lot of their information from hedge funds which are naturally trying to get others to follow whatever will benefit their own portfolios.

Why have the media suddenly been talking about a "Fed pivot?" It's not because financial journalists have suddenly discovered how to interpret whatever the Fed has been doing. It is because they receive a lot of their data and even more of their interpretation of that data from hedge funds which naturally want to get retail investors to pile into their largest positions. In addition, whenever any asset is especially popular or depressed, the media will seek out stories which will allegedly explain "why" U.S. Treasury yields will keep climbing even when they are at their highest levels since 2000 (as in October 2023) or why AI stocks will keep rising regardless of how overpriced they are (as in December 2023). If you follow the media then you will repeatedly buy near each top and sell near each bottom.

The current U.S. equity bear market is following its usual sequence of sector bottoms.

The Russell 2000 and nearly all related funds such as IWM, along with most stocks worldwide which are unrelated to the AI bubble, have been in notable bear markets since their November 2021 tops, on average losing about 20% of their value during the past 25 months. Before any U.S. equity bear market intensifies, as the current one will almost certainly do soon, we have a sequence of historic sector bottoms which are completed in the following order: 1) U.S. Treasuries which probably completed their nadirs in October 2023 and are in major uptrends; 2) gold mining and silver mining shares which I expect will bottom around the spring of 2024 before initiating powerful rebounds; 3) emerging-market stocks and bonds which will perhaps bottom around the summer of 2024 with Chinese shares notably underpriced and which could thereby become compelling bargains at that time; 4) non-precious commodity producers which might also gain by substantial percentages after they bottom later in 2024; 5) special situations which vary from one bear market to another. In this case, the sectors which could approach multi-year lows in 2024 and thereafter rally strongly might include currently unpopular biotech shares and their funds like XBI along with airline shares and their funds including JETS.

I also plan to be open-minded about other sectors becoming worthwhile for purchase sometime during 2024.

The ultimate bottoms for most AI shares won't occur until 2025 or 2026.

As a general rule, those shares which achieve historic bubbles tend to lose over 80% of their value and to take two to three years to complete their total downtrends. After QQQ had topped out on March 10, 2000, it lost 83.6% of its value by the time it bottomed exactly 31 months later on October 10, 2002 (see stockcharts.com which includes all reinvested dividends by default). If QQQ loses 83.6% of its recent high of 406.5, which could potentially go even higher in the short run, then this would mean an eventual QQQ bottom of 66.666 which looks to me like a very lucky number indeed.

The bottom line: An increasingly profitable strategy during the 21st century capitalizes on the tendency of the vast majority of hedge funds to use momentum methods and to thereby overcrowd massively into various positions. Top corporate insiders and commercials throughout various points in 2023 have been doing almost exactly the opposite of those hedge funds near all key extremes for a wide variety of assets including AI stocks in December (QQQ,SLK,SMH), U.S. Treasuries in October (TLT), the Japanese yen in November (FXY), large-cap energy shares in September (XLE), and all precious metals in early December including palladium (PALL), gold (GLD), and silver (SLV). You can therefore consistently make money, although not always immediately, by following the insiders and commercials and doing the exact opposite of the most overcrowded hedge-fund concentrations during the next several years.

Disclosure of current holdings:

Below is my current asset allocation as of 4:00 p.m. on Friday, December 22, 2023. Each position is listed as its percentage of my total liquid net worth.

I computed the exact totals for each position and grouped these according to sector.

The order is as follows: 1) U.S. government bonds; 2) shorts; 3) bear funds; 4) gold/silver mining; 5) coins; 6) miscellaneous securities.

VMFXX/TIAA(Traditional)bank CDs/FZDXX/FZFXX/SPRXX/SPAXX/Savings/Checking long: 36.32%;

26-Week/17-Week/52-Week/13-Week/2-Year/8-Week/3-Year/5,10-Year TIPS/4-Week/42-Day long: 21.66%;

TLT long: 11.67%;

I Bonds long: 10.54%;

PMM long: 0.01%;

XLK short (all shorts once again unhedged): 28.39%;

QQQ short: 17.23%;

XLE short: 5.15%;

XLI short: 2.77%;

XLV short: 1.69%;

SMH short: 1.01%;

AAPL short: 0.02%;

SARK long: 0.90%;

PSQ long: 0.03%;

PALL long: 0.20%;

GDXJ long: 0.14% (fully hedged with out-of-the-money covered calls);

Gold/silver/platinum coins: 6.28%;

FXY long: 0.17%;

PAK long: 0.03%.

"In a world in which most investors appear interested in figuring out how to make money every second and chase the idea du jour, there's also something validating about the message that it's okay to do nothing and wait for opportunities to present themselves or to pay off. That's lonely and contrary a lot of the time, but reminding yourself that that's what it takes is quite helpful." --Seth A. Klarman

CALDRON BUBBLE (January 17, 2023): We are in the second year of the collapse of the "everything bubble." Unless you are in your 90s or over 100 years old and you were trading during the Great Depression, or you're in kindergarten and you could be trading into the 22nd century, this will end up being the biggest bubble collapse of your lifetime.

U.S. stocks, high-yield corporate bonds, real estate, art, used autos, baseball cards, and of course cryptocurrencies are all declining almost the same way that they did following a similar bubble in Japan which had peaked at the end of 1989. As for the U.S. stock market, there are many parallels in 2022-2025 with 2000-2003 which we will discuss in more detail later in this essay.

The most important characteristics of bubbles is that regardless of how or why they form, they all collapse nearly identically. This was first chronicled in detail by Charles Mackay in his 1841 classic publication, "Extraordinary Popular Delusions and the Madness of Crowds."

2023 will likely have a very different shape from 2022 although it will also primarily be a bear-market year.

Bear markets for all assets usually feature the most sharp rebounds within the context of dramatic long-term declines.

The lion's share of the market's losses in 2022 occurring in the most overvalued shares. High-P/E large-cap technology shares in 2022, just as in 1973 and 2000, were among the biggest percentage losers. From its March 10, 2000 intraday top to its October 10, 2002 intraday bottom, QQQ, a fund of the top 100 Nasdaq companies, lost 83.6% of its value which is more than 5 dollars out of 6. It is likely that a similar percentage decline is in progress following QQQ's all-time zenith in November 2021, with the losses for QQQ ending up twice or thrice as much as many other U.S. equity index funds.

We could get a much higher VIX and a much deeper pullback for U.S. equities in 2023 as compared with 2022.

I expect the S&P 500 Index to probably drop below three thousand at some point during 2023. If this occurs around mid-year rather than near the end of the calendar year, and if it is accompanied by the highest level for VIX since March 2000, massive investor outflows, and heavy insider buying, then this could provide our first opportunity to actually close out short positions and go heavily net long many deeply-undervalued securities. This would not be because the bear market will be over, as 2024 will almost surely feature the greatest percentage losses of the entire bear market. However, it could be possible to make numerous diversified purchases of washed-out securities around the middle of 2023 which could be huge winners within several months at which time most of them should be sold.

Even in the most severe bear markets, you can often make more money by going long prior to the bounces following deeply-oversold bottoms than from going short into the declines themselves.

Remember your favorite kindergarten story: Goldilocks and the Three Bears.

If March 2020 through January 2022 was Goldilocks, then 2022-2025 will feature the inevitable starring roles for the Three Bears. Baby Bear is an apt description of 2022, with numerous equity pullbacks each followed by a sharp rebound. Mama Bear should be an apt description of 2023 with a much more severe parental punishment, followed by a motherly strong rebound. This still leaves Papa Bear's powerfully destructive grip for 2024, of which we will talk more in future updates.

Investors on the equivalent of the Titanic prefer to upgrade their cabins rather than to head for the lifeboats.

In early 2001 investors had been migrating away from slumping large-cap tech shares and moving into energy, industrials, healthcare, and whatever else had been outperforming in 2000. Similar behavior has been occurring recently, with funds including XLI (industrials), XLV (healthcare), and XLF (financials) only modestly below their all-time tops. Last week XLI had the biggest net inflow of all exchange-traded funds. Just as in 2001, investors in early 2023 are unwilling to accept that we could be in a bear market and that they should therefore purchase something safe like 26-week U.S. Treasuries yielding between 4.8% and 4.9%. Instead, they think they are immune to losing money if they are in the "right" sectors.

As in all bear markets, most analysts are emphasizing "looking for quality" instead of diversifying into safer assets. The problem is that they're looking for quality in all the wrong places.

Bogleheads will be Bogleheads.

Near the end of 1999 I was working for a company in Manhattan which offered 401(k) options to its employees. Two of these choices were entirely invested in Nasdaq shares, one with large-caps and one which was more diversified but still highly speculative. The custodian of these assets sent a representative to "educate" (i.e., brainwash) employees on their options, failing to mention that these Nasdaq funds featured fees which were triple those of more conservative bond funds in the plan. They also did typical Boglehead tricks like showing charts of how these funds had performed--but going back to 1982 rather than some other year. I was upset enough to write a written complaint to the head of human resources and copy the CEO, and also to point out that they were subjecting themselves to potential legal action in a future year. They dismissed my complaints as being absurd.

In response, I organized a meeting of my co-workers in which I arranged to give a lecture about how the financial markets work. I was already teaching a class in the financial markets to new employees, so people were familiar with my experience. I gave one of my most eloquent explanations of how the Nasdaq and its funds were very dangerously overpriced. Many people commented that they had no plans to change their allocations since "the market always goes up in the long run" and this kind of commonly-heard nonsense, but over the next few years quite a few people came up to me privately and told me that they paid attention to my advice and reduced their risk.

The most reliable bear-market signals are ringing loudly of further losses.

VIX, an important signal of investor fear, hasn't even approached 40 so far in the current bear market. VIX slid to an intraday low of 18.01 on January 13, 2023, a one-year bottom. VVIX, also known as the VIX of VIX, has recently been rebounding from a multi-year nadir. We haven't had anywhere near the typical heavy net outflows that have characterized every bear-market bottom in history, nor the intense levels of buying by top corporate executives which had featured so prominently at major bottoms including March 2009 and March 2020 and were far more prevalent at minor bottoms such as December 2018. The failure by average investors to be worried about additional losses, and the indifference by insiders in accumulating shares near recent lows, are both clear signs that additional substantial losses still lie ahead.

In 2021 we had greater net exchange-traded fund inflows than during the entire twenty-year period from 2001 through 2020 combined. In 2022, even with notable declines for equity valuations, we had the second-highest total after 2021.

Stock Funds Took in More Cash in 2021 Than Two Decades Combined

Inflows for Globally Listed ETFs Reach Second-Largest Tally Ever in 2022

Fundamental valuations for most assets remain enormously above long-term historic averages.

QQQ and the S&P 500 have dropped from all-time record overvaluations a year ago but are still both trading at more than double their average ratios relative to the profits of their components. Real estate has fallen modestly from its all-time highs in recent months, but is about 75% overpriced on average in U.S. cities and more than that in many parts of the world. Assets in true bear markets don't just retreat somewhat and then resume their uptrends. They usually bottom well below fair value as we had seen for stocks in late 2002 and early 2003 as well as late 2008 and early 2009. For real estate we had many deeply undervalued neighborhoods at various points from 2010 through 2012.

After experiencing an extended correction since its September 28, 2022 two-decade high, the U.S. dollar index could be ready for its next multi-month uptrend.

Some undervalued assets including U.S. Treasuries have probably begun multi-year bull markets.

U.S. Treasuries, including their funds like TLT, fell to multi-decade lows in the autumn of 2022 and have begun forming several higher lows. Each week I have been buying 26-week U.S. Treasury bills along with other short-term Treasury securities as they have been enjoying their highest yields in 15-1/2 years. One consistent winner in bear markets going back to the late 1700s has been U.S. Treasuries of nearly all maturities.

Gold mining and silver mining shares likely resumed their bull markets in September 2022, right on schedule.

In March 2000 the S&P 500 completed its top and initiated a huge bear market which didn't end until October 2002. Gold mining and silver mining shares, as measured by $HUI and other reliable indices and funds, bottomed in mid-November 2000 which was eight months later. Fast forward to 2022. The S&P 500 completed its top on January 4, 2022 while GDXJ and related funds slid to multi-year lows (although remaining well above their March 2020 bottoms) in September 2022, once again eight months following the S&P 500 top. Looking back at 2000, gold/silver mining shares were among the top-performing sectors over the next three years and over the next decade. This is likely to be the case over the next several years also.

Gold mining and silver mining shares will dramatically outperform in the upcoming decade with periodic pullbacks of 15% to 25%. Only buy them after such pullbacks.

I have been maintaining my long positions in gold mining and silver mining funds including GDXJ, ASA, GDX, and BGEIX in that order. These consistently outperform following the collapse of U.S. growth bubbles, although they will periodically suffer moderate pullbacks of 15% to 25% just as they had done during November 2000 through December 2003.

I have been steadily adding to my short positions and reducing my long positions in preparation for the next downward trend for U.S. equities.

While I have been maintaining my short positions in XLK and QQQ, in recent months I have been adding to short positions in XLI, XLV, and SMH whenever VIX is below 20 and in XLE whenever insiders are heavily selling energy shares.

We had an all-time record level of insider selling of the largest global energy companies in recent months, so I began selling short XLE near 93 and 94 and have been continuing to add to this short position into its recent lower highs near 90 and 91. XLE has been one of the biggest outperformers since its March 2020 bottom and is therefore likely to be one of the biggest losers until insiders are once again heavy buyers. During several periods in 2020, including the spring and early autumn, we had the heaviest-ever insider buying of energy shares. Energy insiders seem to be especially astute in buying low and selling high.

Here are some useful charts which illustrate the above points.

The following chart highlights that the 2022 U.S. housing bubble surpassed the previous dangerous bubble peak of 2005-2006:

The Nasdaq in recent years has very closely tracked the Nikkei in the late 1980s as all true bubbles collapse identically:

The S&P 500 Index is its most overvalued in its entire history relative to risk-free U.S. government bonds:

Measured using price-to-sales, the S&P 500 has been far more overpriced recently than at any time in recent decades including 1999-2000:

Commercials, the equivalent of insiders for futures trading, have approached multi-year highs in accumulating the 30-year U.S. Treasury bond:

Lengthy bull markets from August 1921 through September 1929 and October 1990 through March 2000 were both followed by bear markets which lasted over 2-1/2 years apiece, therefore likely setting the stage for a repeat:

The bottom line: expect two more bear-market years through late 2024 or perhaps 2025.

Numerous analysts have declared that "the bear market is over" and use as "evidence" the hilarious proclamation that down years are followed by up years a large percentage of the time. This is like concluding that you don't need to take an umbrella when you go outside, since it will usually not be raining--except when it is. Checking the weather forecast or actually going outdoors to see for yourself is much more reliable than going by irrelevant long-term statistics, and there can be no doubt that stormy weather in the financial markets will be with us for roughly another two years. If you're very conservative then put all of your money in U.S. Treasury bills up to 52 weeks while emphasizing the weekly 26-week auctions. If you're willing to assume greater risk than gradually sell short the most-overvalued large-cap U.S. equity funds including XLI, XLE, XLV, and SMH.

Disclosure of current holdings:

Here is my current asset allocation as of the close on Tuesday, January 17, 2023:

TIAA(Traditional)/VMFXX/FZDXX/SPRXX/Savings/Checking long: 34.54%;

XLK short (all shorts currently unhedged): 17.52%;

QQQ short: 6.23%;

XLE short: 4.61%;

XLI short: 2.24%;

XLV short: 1.53%;

SMH short: 0.06%;

GDXJ long: 10.84%;

ASA long: 6.77%;

GDX long: 2.88%;

BGEIX long: 1.48%;

2-Year/3-Year/52-Week/26-Week/13-Week/5-Year TIPS long: 10.04%;

I Bonds long: 9.19%;

TLT long: 8.65%;

Gold/silver/platinum coins: 5.55%;

HBI long: 0.30%;

WBD long: 0.25%;

EWZ long: 0.08%;

EWZS long: 0.04%;

The numbers add up to more than 100% because short positions only require 30% collateral (by SEC regulations; some brokers require more) to hold them with no margin required.

“If it's obvious, it's obviously wrong.” --Joe Granville

EPHEMERAL EXTREME ELECTION EUPHORIA (November 8, 2020): As a result of eager investor anticipation of a new U.S. political configuration the shares of risk assets have generally climbed during the past several trading days. This has made the least-experienced investors especially excited about getting "back into the market" and once again buying unusually intense quantities of speculative out-of-the-money call options. Insiders have been doing the exact opposite, dramatically accelerating their selling to tabulate some of the highest-ever ratios of selling to buying ever recorded for many popular large tech companies. When the most-experienced investors are doing nearly the exact opposite of the least-knowledgeable participants then you can be pretty certain who is going to be correct once again. In March 2020 we had the exact opposite where we had two consecutive weeks of all-time record net withdrawals from equity funds while insider buying relative to selling touched its most elevated ratio since March 2009.

Following both March 2009 and March 2011 we experienced powerful two-month rallies. Following all periods of similarly intense insider selling relative to buying as we have recently experienced, the most popular shares generally declined dramatically over a few months and are likely to do so again.

Several investments are currently especially compelling either to buy or to sell. Here they are with the most compelling one listed first on down the line:

1) QQQ, XLK, and similar funds of the most popular U.S. mega-cap technology companies have only been more overvalued in their entire history at the beginning of September 2020 when most of them achieved all-time zeniths and during the second week of October 2020 when they completed marginally lower highs. We have likely registered or will soon finish making additional lower highs for these shares. Even in historic years for popular growth stocks including 1928-1929, 1972-1973, and 1999-2000 we never had valuations as stretched as they are currently. We are likely on the verge of the next important correction which will rival the February-March pullback earlier this year and will probably exceed its declines in percentage terms for the majority of the most popular tech stocks. I have been adding to my short for QQQ each time it touches 295. If current overnight trends continue then QQQ could reach 296 or more in early trading on Monday, November 9, 2020 which would represent an ideal opportunity to add more of it on the short side. The resolution of U.S. Presidential election uncertainty is providing a wonderful selling opportunity for large-cap tech shares since no political alignment can trump [pun intended] all-time record overvaluations.

Probably the primary difference between the February-March 2020 correction and the current one is that this one is developing much more slowly. I believe it will also be harsher for the most popular big tech stocks.

2) TLT likely completed its next important higher low at 155.10 at 19:20:17 on November 3, 2020 when the earliest U.S. elections results were beginning to be counted. Since then TLT has been choppily rebounding. I have been buying TLT consistently below 159 and it dipped again below that mark on Friday, November 6, 2020. TLT is a fund of U.S. Treasuries averaging 26 years to maturity. Many investors avoid TLT because it seems to be closer to its long-term top than its long-term bottom but this is overlooking a bull market which has existed for this sector since September 1981 as well as a recent huge surge of fresh commercial buying of U.S. 30-year Treasury futures. Below is a chart highlighting the intensity of the commercial buying--notice the maroon bars growing in size on the right:

With the kind of extremes that we have in the above chart it is worthwhile to purchase TLT and other funds of long-dated U.S. Treasuries whenever TLT is below 160 with the idea of selling in early 2021 above 170.

3) The U.S. dollar is widely hated but is completing additional higher lows not far above its lowest levels since April 2018.

On September 1, 2020 the U.S. dollar index slid to 91.746 which marked its most depressed point since April 2018. The U.S. dollar index seems to be forming higher lows while most speculators are betting on a weaker greenback. What is likely to occur is that the U.S. dollar will rally to its highest point since the stock-market plunge of March 2020. There is no ideal way to directly invest in a rising U.S. dollar but owning U.S. Treasuries, U.S. time deposits including bank accounts, and U.S. money-market funds is a worthwhile conservative approach. Preservation of capital is far more important over the next few months than trying to achieve unsustainable gains.

The Russell 2000 is nowhere near its August 31, 2018 top and has been forming lower highs throughout 2020.

Since the first U.S. stocks were traded in 1790 (in Philadelphia two years before the New York Stock Exchange) it has consistently been the case that small- and mid-cap shares complete their respective cycle tops in advance of their large-cap counterparts, and whenever this occurs the subsequent losses for both are huge. The Russell 2000 has not only failed to surpass its August 31, 2018 top of 1742.0889 but it has also made several lower highs throughout 2020. We have also experienced a massive surge of new investors who were mostly still in school when the last bear market occurred and have little or no understanding of market history. Regardless of the fundamentals of any trade, whenever any position becomes dangerously overcrowded the market almost always moves in the opposite direction of that crowd.

Investors are confusing the near-term market behavior with how it will behave between now and early 2022.

Some investors believe that we will experience rising inflation, significantly higher interest rates especially on the long end, a resurgence for small- and mid-cap value shares, and generally rising commodities over the next 1 to 1-1/2 years. While this may be correct in the longer run it is almost certainly wrong in the short run since far too many investors have piled into these and related trades. The market will repeatedly punish stale long positions in the most popular shares. We will almost surely get significantly higher lows for VIX, TLT, and the U.S. dollar over the next few months combined with memorable losses of 30% or more for the most popular technology shares by the end of the 1st quarter of 2021 or sooner. Once most investors have given up on their positions we will then experience rising inflationary expectations and generally higher prices for commodity-related and other assets which prefer rising interest rates. The actual end of coronavirus, rather than its anticipation, will tend to accelerate this process.

The market's intraday behavior demonstrates repeated extremes outside of regular trading hours.

I have been trading much more frequently outside of regular hours in order to obtain the lowest prices for unpopular assets I am buying and to obtain the highest prices for the most overloved shares I am selling. I am much more frequently having orders filled with a combination of tiny partials instead of all at once. These two observations are related: the least-experienced traders who tend to buy near the top and to sell near the bottom only have enough money to trade a few shares at a time and are too busy at their 9-to-5 jobs to trade during regular hours.

Several undervalued sectors remain worthwhile for purchase but keep your total long positions smaller than your total short positions.

I am a big fan of those energy companies which have enjoyed the heaviest insider buying in recent months, along with other traditional value names sporting low price-earnings ratios, improving profit growth, increasing dividends, and repeated lows near the opening bell. MTDR, PSX, XOM, and GEO are examples of companies which fit into this category. Don't go overboard in accumulating these until VIX starts to form lower highs from a multi-month peak which will be a sign that the most-experienced options sellers are becoming less fearful of additional market losses. This will not likely occur until sometime this winter.

Boglehead investors in particular will keep underperforming due to not having sufficient cash to be a heavy buyer near each important intermediate-term bottom.

The growth of your entire portfolio in 2020 is primarily a function of how much money you had put into the market in March 2020--which is a function of how much cash you had raised in the weeks leading up to the February-March plunge. Those who were far too heavily invested in February 2020 didn't have nearly enough cash to do substantial buying the following month near multi-year lows and thus missed out on a prime opportunity to grow their total net worth. Similarly, those who haven't been opportunistically and aggressively selling near all important highs in recent months will not have nearly enough cash to be a major buyer whenever the next bottom is being formed perhaps in early 2021. This is one glaring deficiency of a Boglehead approach: it works okay in a smooth upward trend but fails miserably when it is essential to keep buying low and selling high on a frequent basis. Active asset reallocation in this kind of volatile market is far more important than exactly what you are buying, although you should favor securities which have rallied under similar past scenarios where small- and mid-cap value have begun to trounce previously-dominant large-cap growth including 1973-1976 and 2000-2003.

The bottom line: I am 5/8 in cash, 20% in long positions, and 31% in short positions [this actually adds up to 100% due to shorts being treated differently by the SEC].

I have increased my short positions in QQQ while gradually purchasing MTDR, PSX, XOM, and GEO each time those approach multi-month lows especially near the opening bell when the least-experienced investors tend to sell them in small quantities. I bought TLT especially as it fell as low as 155.10 in the after-hours session on November 3, 2020. I have been selling short QQQ at 295 and above as I have been doing since August 2020 and will continue to do.

Disclosure of current holdings:

From my largest to my smallest position I currently am long the TIAA-CREF Traditional Annuity Fund, bank CDs, money-market funds, Discover Bank Savings paying 0.55%, I-Bonds from 2001-2003, MTDR (some new), TLT (all new), PSX (some new), GEO (some new), XOM (some new), XES, BCBP, BOH, KRNY, OPBK, CDEV, WTI, SONA. I have 9.4% of my total liquid net worth in the previously-mentioned energy securities, 5.9% in the regional banks I listed, 2.7% in TLT, 2.3% in GEO, 0.1% in EWZ purchased below 27, and am otherwise completely sold out of everything else on the long side.

I have 17.5% of my total liquid net worth short XLK, 5.2% short TSLA, 4.1% short QQQ (some new), 2.3% short ZM, 0.8% short AAPL, and 0.4% short SMH. I plan to keep adding especially to my QQQ short into strength whenever QQQ is near 295 or above. My cash and cash equivalents including bank CDs, savings/money-market accounts, I-Bonds, stable-value funds (fixed principal, variable interest) comprise 63.0% of my total liquid net worth. (It seems to exceed 100% but for short positions only part of the total cash value is required to hold them.)

I am currently sporting my heaviest net short percentage since August 2008, even more than at the beginning of September 2020.

“The trick of successful investors is to sell when they want to, not when they have to.” --Seth Klarman

2020 RETREAT, 2021 REBOUND (August 23, 2020): The most difficult aspect of investing is appreciating the urgency to act when almost no one else wants to do so and to refrain from trading when almost everyone else is either excitedly chasing after recent extended strength or selling in a panic following recent dramatic losses. Now is one of those times when Robinhood investors are tripping over themselves to purchase the most overpriced mega-cap technology shares while most investors are congratulating themselves for not selling in March 2020. Far too many are oblivious to the huge dangers of remaining heavily invested at the most overvalued stock-market top in history surpassing the previous record extremes of 1928-1929, 1972-1973, and 1999-2000. Just during the past week the market has sent multiple simultaneous signals of imminent danger and yet investors are mostly partying like it's 1999. They'll end up suffering the same fate of those who didn't sell two decades ago when the Nasdaq plummeted 78.4% from 5132.52 on March 10, 2000 through 1108.49 on October 10, 2002.

Three key leading indicators completed major reversals during the past week.

Let's consider each of these three indicators in order of importance:

1) The U.S. dollar index likely completed a 27-month bottom of 92.127 at 10 a.m. Eastern Time on August 18, 2020 followed by a higher low of 92.154 at 9 p.m. the same day. Whenever the U.S. dollar begins to rebound from an important bottom it generally indicates that risk-off is likely to prevail for some unknown period of weeks. Given typical calendar behavior it is likely that risk assets worldwide, including most U.S. equity indices, will drop to complete important bottoming patterns during the final weeks of 2020 and perhaps at the beginning of 2021.

2) VIX may have completed a six-month bottom of 20.28 on August 11, 2020 followed by a higher low of 20.99 on August 19, 2020. When VIX completes an intermediate-term bottom during a bear market for U.S. equities, it often surges higher afterward as investors are mostly stunned by the stock market's sudden pullback. While VIX may not return to the mid-80s where it had been in March 2020 it is likely to regain 60 or 70 before the end of 2020.

3) SMH is a fund of semiconductor shares which may have peaked at 9:39 a.m. on Tuesday, August 18, 2020 with an all-time high price of 174.33. For more than a half century semiconductor shares have completed important tops and bottoms in advance of most other U.S. equity indices as a useful leading indicator. It could be different this time but probably it isn't. SMH will probably similarly let us know when the downtrend is coming to an end several months from now.

Breadth is deteriorating with fewer and fewer shares achieving new all-time zeniths.

The Russell 2000 Index, consisting of two thousand medium-sized U.S. corporations, topped out on August 31, 2018 and hasn't reached that level since then, with lower highs in January 2020, February 2020, and August 2020. Over the past two years we experienced two meaningful corrections for U.S. equity indices: during the autumn of 2018 when the S&P 500 dropped over 20% and in February-March 2000 when the S&P 500 slid just over 35%. Most likely we have already begun or will soon initiate a pullback roughly halfway between these declines or perhaps around 27.5%. The S&P 500 almost reached 3400 which it had barely failed to surpass in January-February 2020, this time falling short by just 46 cents. During the past week there were far fewer new 52-week highs than we had experienced during previous peaks for the S&P 500 in recent years. According to this week's Barron's there were only 220 new highs on the New York Stock Exchange, 284 on the Nasdaq, and 8 for NYSE American.

Insider selling relative to insider buying is near all-time highs going back several decades.

Top corporate U.S. executives have been aggressively selling, with among the highest ratios ever recorded for insider selling to insider buying in August 2020. In March 2020 we had the biggest ratio of insider buying to insider selling since March 2009 and the market rallied accordingly. Watch out below.

The market's intraday behavior demonstrates the greatest strength whenever Robinhood investors are busiest trading.

In recent weeks the greatest gains for U.S. stocks tend to occur near the opening bell on the first trading day of the week, usually a Monday, as market orders placed during the weekend all crowd in simultaneously. With most inexperienced traders being busy at their jobs during regular trading hours, many of them don't have time to trade until after the closing bell, thereby leading to funds like QQQ and XLK reaching their highest-ever levels between 6 and 7 p.m. Friday, August 21, 2020 rather than earlier in the day. Expect Robinhood traders to continue to dominate at the beginning of each trading week and sometimes in the after-hours sessions, thereby giving you additional ideal opportunities to sell and to sell short.

The worst losers of recent years are likely to rally strongly in 2021.

One reason for raising lots of cash now is that we are likely to experience compelling bargains for certain sectors near the end of 2020. Which sectors will those be? In recent years small- and mid-cap shares have hugely underperformed the most popular large-cap names. Value shares since June 1, 2007 have set a new all-time record level of sustained underperformance relative to growth shares. Deflation-loving companies have far outpaced assets which benefit from rising inflationary expectations.

In 2021 I expect these losers to exact their just revenge as small- and mid-cap value inflation-loving shares are among the top assets to rebound from their late-2020 bottoms. This would likely include some sectors like gold/silver mining which had been undervalued but had skyrocketed after their mid-March 2020 bottoms, only to become far too popular when gold surpassed two thousand U.S. dollars per troy ounce which attracted the eagerly-chasing Robinhood crowd. Once funds like GDXJ which had reached 65.95 eventually retreat below 40, gold mining and silver mining shares will be worth buying again as they will likely more than double within about one year.

Do not buy too soon. Wait for VIX to start forming lower highs following a multi-month peak and for other leading indicators to signal that the severe autumn stock-market correction of 2020 is almost over.

The bottom line: be mostly in cash and partly in short positions for the rest of the summer and for most of the autumn.

I have significantly increased my short positions as listed below while only doing a tiny bit of buying of GEO each time it approaches or goes below 10.50 per share, and I intend to continue to sell short into all rallies--even modest ones. Hardly anyone I know has been interested in betting against the market, either frustrated by repeated new all-time highs or convinced of foolish conspiracy theories such as the market not dropping substantially prior to the U.S. elections on November 3, 2020. Historically the U.S. stock market tends to be significantly weaker than usual in the months leading up to any Presidential election and this is easily verified by examining the past several years which were multiples of four.

Disclosure of current holdings:

From my largest to my smallest position I currently am long the TIAA-CREF Traditional Annuity Fund, bank CDs, money-market funds, Discover Bank Savings paying 0.80%, I-Bonds from 2001-2003, XES, MTDR, PSX, CDEV, WTI (all energy shares purchased in the second week of July 2020), GEO, BCBP, OPBK, SONA, KRNY (continuing to purchase GEO and regional banks into weakness). I have 5.0% of my total liquid net worth in the previously-mentioned energy securities, 4.2% in the regional banks I listed, 1.7% in GEO, and am otherwise completely sold out of everything else on the long side.

I have 16.7% of my total liquid net worth short XLK (half new), 4.4% short TSLA (some new), 1.7% short ZM (some new), 0.5% short QQQ (all new), and 0.4% short SMH (all new). I plan to keep adding especially to my XLK short into strength whenever XLK is near 117 or above. My cash and cash equivalents including bank CDs, savings/money-market accounts, I-Bonds, stable-value funds (fixed principal, variable interest) comprise 73.7% of my total liquid net worth. (It seems to exceed 100% but for short positions only part of the total cash value is required to hold them.)

I am currently sporting my heaviest net short percentage since August 2008.

“Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred.” --Seth Klarman

SLASH TRASH, STASH CASH (August 2, 2020): The last seven months have featured wild market swings in both directions. At the start of 2020 investors were willing to take absurdly high risks in nearly all assets, being far more concerned about missing out on additional gains than they were about the danger of losing money. During the third and fourth weeks of March 2020 we experienced the two biggest-ever weekly net outflows from U.S. equity funds in their entire history, smashing the previous marks from early 2009 and previous panics. By early June most people had once again become irrationally euphoric, so in my update from that time I recommended heavily selling most securities except for gold mining and silver mining shares which were still in strong uptrends. After a brief pullback which provided buying opportunities for energy shares during the second week of July, we currently have renewed intense irrational exuberance which has spread to precious metals, so last week I unloaded all of my shares of GDXJ, GDX, SIL, SILJ, and related funds and kept only my coins. At the end of the week in response to absurd bullishness regarding mega-cap U.S. technology shares, I significantly increased my short position in XLK to 8.5% of my total liquid net worth and will add more this week if the excitement continues. I now have more shorts than longs and the most cash since February 2012--roughly 5/6 of my total liquid net worth.

VIX kicks.

VIX has been the most consistently reliable indicator throughout the decades in telling us when to buy and when to sell. During the past several weeks VIX has tried repeatedly to slide into the low 20s and has repeatedly failed to do so, with the most recent attempt on Friday, July 31, 2020 when it dropped to 23.55 at 9:06 am. Eastern Time. Sooner or later VIX is going to surge higher and double or triple, although it will not likely surpass its March 18, 2020 top of 85.47. As this is happening most risk assets worldwide are going to suffer much greater percentage losses than most investors are currently anticipating. Hardly anyone has been hedging or establishing short positions in the false belief that the global economy will prosper once the coronavirus is cured. Paradoxically, the sooner there is a proven vaccine and/or cure for the coronavirus, the more rapidly we will experience a severe bear market because there will be nothing to look forward to except huge worldwide deficits and a persistent slowdown in global economic and profit growth.

Tech dreck.

The total market capitalization for U.S. equities is now roughly twice the total U.S. GDP for the first time in history, surpassing its previous all-time record of 1.87 from March 2000 (source: Randall Forsyth in Barron's from August 3, 2020). U.S. mega-cap technology shares are more overvalued than they had been during the end of 1999 and the beginning of 2000 which had been their previous absurd peaks. It should be remembered that the Nasdaq had plummeted 78.4% from its March 10, 2000 top of 5132.52 to its October 10, 2002 nadir of 1108.49 so we are almost certainly setting up for a repeat performance. Adjusted for earnings and inflation the Nasdaq could drop even more over the next few years than it had done during its historic collapse at the beginning of this century. Just as in early 2000, 1929, and early 1973, the market's most-popular companies are especially overpriced. As they regress toward the mean, they are so heavily owned by index funds and trillions of dollars of managed money that this by itself could push the worldwide economy into a recession in another year or so.

Dollar holler.

On Friday, July 31, 2020 the U.S. dollar index slid to a 2:49 a.m. bottom of 92.546 which marked its most depressed point since May 2018, after which it began to tentatively rebound. The U.S. dollar has entered what appears to be a well-entrenched downtrend, so as it reverses sharply higher along with VIX it is likely to surprise and confuse most investors who are expecting additional greenback weakness. The Russell 2000 is revealing the truth: following its all-time top of August 31, 2018 the Russell 2000 has made lower highs in January, February, June, and July. This means that the real U.S. stock market, not counting the biggest and most-popular names, has been in a downtrend for nearly two years. The longer a U.S. equity bear market continues the more frequently we will experience severe corrections such as the one we had suffered in February-March 2020. Lots of people think that was a one-time event "caused by" the coronavirus but it was merely a continuation of a series of corrections including the drop of more than 20% for the S&P 500 Index over a period of more than three months in September-December 2018. Most likely the next three to five months will be accompanied by a drop of at least 20% for all U.S. equity indices and potentially much greater losses by the time the next intermediate-term bottoming patterns are completed.

Gold cold sold.

Have you noticed recent frequent upside price projections for gold these days? Near the end of 2015 and the start of 2016 nearly all analysts were talking about not if, but when gold would drop to 1000 or 800 or 600 or 300 U.S. dollars per troy ounce, with no one talking about gold recovering to 1200 or 1300 which of course is what it did. Now we see repeated guesses as to when gold will reach two thousand, 2500, 3000, 5000, ten thousand, and so on, with hardly anyone suggesting that it might drop to 1800 or 1700. Any very overcrowded trade is always very dangerous regardless of fundamentals.

More importantly, the most reliable leading indicator for gold is its behavior relative to GDXJ and other funds of gold mining shares. When gold first touched 1970 U.S. dollars per troy ounce just before the end of the after-hours session on Monday, July 27, 2020, GDXJ had its last trade of the day at 64.18. On Friday the last trade just before 8 p.m. Eastern Time for GDXJ was 60.25 and that was with gold bullion just above 1975. When higher gold prices are met by lower highs for GDXJ then this is almost always followed by a substantial pullback for the entire sector. It works the opposite way also: when gold bullion keeps dropping while GDXJ resists repeated pullbacks then a rally is usually closely approaching.

The most bearish behavior would be gold actually reaching or closely approaching 2000 while GDXJ keeps forming lower highs.

Sweep creep deep.

There is no guarantee that Democrats will sweep the U.S. House of Representatives, the Senate, and the Presidency on November 3, 2020 but such an outcome has become increasingly likely. Just as in 2008, a Democratic sweep will cause many investors to become fearful of the future. Such a sweep could lead to the U.S. corporate tax rate climbing to roughly 28% (it was lowered from 35% to 21% at the end of 2017) as well as the SALT limitations being repealed and likely significantly higher marginal tax rates for wealthier U.S. residents. Once investors realize simultaneously that long-term capital gains rates are likely to rise sharply on January 1, 2021, investors will rush to lock in currently unusually-low rates during the final weeks of 2020. Combined with tax-loss selling for some of the biggest 2020 losers and disappointment by Robinhood investors that it's not as easy to make money as it looks, we could experience a multi-month decline which doesn't end until the final weeks of 2020 or perhaps in early 2021 followed by the next bear-market rebound.

House louse.

Real-estate prices have rebounded from their sharp March 2020 selloffs partly since 30-year U.S. fixed mortgage rates had briefly dipped below 3% and partly since the coronavirus has caused unusually low inventory, plus the U.S. stock-market rebound has likely engendered overconfidence in many other assets. As U.S. equities and corporate bonds retreat in value, residential inventory is likely to progressively increase as people sell houses to raise cash. The process of falling real-estate prices is likely to accelerate in 2021-2022 and perhaps beyond, with the primary reason in 2021 being an unexpectedly large rise for mortgage rates as both inflation and interest rates surprise everyone including the Fed with their resurgence. 2022 is likely to bring a worldwide recession and the lowest stock-market valuations in more than a decade, both of which will exert additional downward pressure on housing prices. Many people don't realize that, according to Robert J. Shiller in a New York Times article from earlier today (July 31, 2020), inflation-adjusted U.S. home prices soared 45% from February 2012 through May 2020. This increase is entirely artificial, helped by new U.S. government rules to allow nearly anyone with a good credit rating to buy nearly any house with zero down payment or closing costs which are financed along with the house itself. Real U.S. housing prices slid 36% from December 2005 through February 2012 (source: the same NYT article) so some kind of repeat performance is likely. Houses are no longer as "safe as houses": in the age of the internet they fluctuate sharply in both directions just like stocks, bonds, collectibles, and everything else. It's a small world after all.

The bottom line: get heavily into cash now to minimize your potential losses for the remainder of 2020 and to have plenty of buying power for what will likely become numerous compelling bargains.

Investors tend to be too heavily committed too much of the time, thereby making it impossible to fully take advantage of true bargains such as we had experienced in March 2020. Since the Russell 2000 and most baskets of small- and mid-cap U.S. equities have been in downtrends since August 2018, we are likely to experience several more major corrections over the next few years. You can often make more money in a U.S. equity bear market by making opportunistic purchases near all intermediate-term bottoms than you can by selling short on the way down, although it also makes sense to be short funds like XLK and QQQ or if you have a retirement/cash account to buy something like PSQ which will have inferior returns to selling short directly but which is taxed more lightly in some jurisdictions including Canada. I had recommended holding onto gold mining and silver mining shares two months ago but now those should be sold also.

Disclosure of current holdings:

From my largest to my smallest position I currently am long the TIAA-CREF Traditional Annuity Fund, bank CDs, money-market funds, Discover Bank Savings paying 0.95% (mostly new), I-Bonds, XES, MTDR, PSX, CDEV, WTI (all energy shares purchased in the second week of July 2020), GEO, BCBP, OPBK, SONA, KRNY (continuing to purchase regional banks into weakness). I have 5.0% of my total liquid net worth in the previously-mentioned energy securities, 3.5% in the regional banks I listed, 1.5% in GEO, and am otherwise completely sold out of everything else on the long side.

I have 8.5% of my total liquid net worth short XLK, 4.0% short TSLA, and 1.5% short ZM. I plan to keep adding especially to my XLK short into strength whenever XLK is near 110 or above. My cash and cash equivalents including bank CDs, savings/money-market accounts, I-Bonds, stable-value funds (fixed principal, variable interest) comprise 83.3% of my total liquid net worth, my highest percentage total since February 2012. (It seems to exceed 100% but for short positions only part of the total cash value is required to hold them.)

"Those who cannot remember the past are condemned to repeat it" (George Santayana). "Those who can remember the past but insist that it's different this time deserve to repeat it" (Steven Jon Kaplan).

The two previous longest bull markets in U.S. history occurred as follows: 1) from August 1921 through September 1929 which was followed by a bear market of over 34 months from September 1929 through July 1932; and 2) from October 1990 through March 2000 which was followed by a bear market of 30-31 months in duration (exactly 31 for the Nasdaq). The longest-ever bull market which began for the S&P 500 on March 6, 2009 and which may have ended for that index on February 19, 2020 might therefore last for 30-36 months which implies a major bottom somewhere near the end of 2022. The bear market for the Russell 2000 and many other small- and mid-cap U.S. shares began on or around August 31, 2018 and has therefore been intact for nearly two years with several key lower highs along the way.

Friends don't let friends become overinvested.

“Humans are prone to herd because it is always warmer and safer in the middle of the herd. Indeed, our brains are wired to make us social animals. We feel the pain of social exclusion in the same parts of the brain where we feel real physical pain. So being a contrarian is a little bit like having your arm broken on a regular basis.” --James Montier

FEAR: STOP FEEDING, START FADING (March 8, 2020):

There are two ways investors can respond to the coronavirus panic. The first one is the overly obvious wrong one: pile into long-dated U.S. Treasuries; buy shares of companies like Clorox and drug-related corporations which will allegedly benefit from a vaccine or some kind of cure; massively sell energy and travel shares and anything else which would be negatively affected by virus fears. Taking these actions has been widely popular as you can immediately see as yields on the 10-, 20-, 30-, and related U.S. government securities have plummeted to their lowest levels ever recorded since U.S. debt was first available in 1791. Many of these yields are not only all-time records but are roughly half the previous lows while representing the greatest-ever negative real yields (i.e., after adjusting for inflation) in U.S. history. Meanwhile, already-undervalued shares in sectors like energy and travel have become even more illogically depressed.

Second-level thinking is essential to profit in the financial markets. If they act early enough, first-level investors may sometimes be ahead in the short run but almost always lose in the intermediate and long run.

If taking panic action like piling into U.S. Treasuries is obvious even to the average pre-K investor who has barely learned to recognize the letters in the symbol names then probably it is not going to be a successful approach. More importantly, successful investing is almost always not about recognizing the obvious but gauging the most extreme overreactions by others who have recognized the obvious as a thundering herd. If media headlines about a virus lead to less travel then perhaps travel shares should drop by a tiny amount but not by fifty, sixty, or seventy percent. Even in an unusually volatile year like 2008 actual energy supply and demand fluctuated by only a half percent as prices quadrupled and then plunged below their pre-quadrupling levels. After the 9/11 terrorist attacks analysts were confident that flying and other forms of travel would remain depressed indefinitely. It is the absurd extent of the most exaggerated overreactions which provides most worthwhile buying and selling opportunities. Just as we adjusted after 9/11 to the knowledge and responsibility regarding occasional terrorist attacks, one way or another society will adjust more rationally to the existence of coronavirus. People will want to travel as much as they had done before and otherwise live fully again while knowing what do do in case they exhibit certain symptoms characteristic of coronavirus. Doomsday scenarios of "never doing so-and-so again" have always proven to be false in past decades and centuries.

Full credit must be given to Howard Stanley Marks for popularizing the concept of second-level investing. Like myself he has also become a recent heavy buyer of the least-popular shares worldwide.

The incredible level of worldwide stimulus in response to coronavirus is the main financial story and one which has been woefully underemphasized.

The financial media are rife with speculation about how this or that asset will allegedly react to coronavirus. The fact is that the market has already reacted, overreacted, overreacted some more, and then ridiculously way overreacted again. What almost no one is emphasizing is how governments around the world have been cutting overnight lending rates, pouring record billions into their economies--at least one or two trillion overall eventually--and how this is occurring not during a severe recession but near the end of an eleven-year global economic expansion. The real dilemma is that the worldwide economy is likely to generate rising inflationary expectations rather than deflation or contraction. The end of any lengthy economic expansion will eventually be a worldwide recession, but coronavirus has invited massive stimulus which other than an initial brief negative GDP impact has likely postponed the arrival of such a recession by more than a year.

The media know they will get more viewership by hyping the coronavirus and making it seem personally imminent, rather than responsibly reporting on current advanced efforts to develop cures and how people should avoid irrational overreactions.

Energy shares are trading near two-decade lows with some of them near three- and four-decade bottoms.

The sector with by far the most insider buying for an extended period of time has been traditional oil and gas shares and companies which service and are connected with those producers. Profits are generally much higher now than they had been in past decades so their price-earnings ratios and other fundamentals have become amazing bargains even when compared with past recession nadirs. In 2008 we had irrationally undervalued energy followed by the highest overpricing in history followed by a second irrational undervaluation, all within a single calendar year. Investors who are currently overreacting to the downside will be wildly speculating and pushing prices of energy shares to multi-year highs perhaps two years from now. Exactly why the shares of energy companies are so volatile and tend to fluctuate roughly in two-year swings is unclear but what has been the case in the past will almost certainly continue into the future.

Worthwhile funds in this sector include FCG, OIH, XES, and PSCE. PSCE is especially unpopular since it consists of small-cap energy names, and small-caps worldwide are out of favor at the same time that energy companies are unpopular--thus providing you with an attractive double play.

As I am writing this Sunday night, March 8, 2020, West Texas intermediate crude oil just dipped briefly to 27.90 U.S. dollars per barrel which it had not touched since the early weeks of 2016. Regardless of what it does in the short run, this price will roughly triple within about two years.

Travel shares have become as irrationally oversold as they had been after the 9/11 terrorist attacks.

Other than energy the heaviest insider buying during the past several trading days has been for companies which are connected directly or indirectly with travel. The assumption is that because of coronavirus--that excuse again--people will permanently travel less for business and pleasure than they have done in the past. Those who remember 9/11 remember similar forecasts; just two years later we had new all-time records for flights and vacations. This time it may not even take two years to rebound strongly because a partial cure might be found any day or warming weather could greatly reduce the virus' spread or a vaccine could be developed--or all of the above. Insiders don't have special knowledge but they recognize that when valuations have become their cheapest in decades it is usually worth gradually buying especially when so many investors are selling first and asking questions later if at all.

Cruise-line shares CCL, RCL, and NCLH have been especially out of favor in recent trading days and will likely all rebound significantly over the next several months.

Hardly anyone is considering the political impact of coronavirus as Democrats have a far greater chance of retaking the U.S. Presidency and the Senate while retaining control of the House of Representatives.

What does Donald J. Trump point to most often as the justification for having another four years in office? It is the way he has allegedly pushed the stock market higher. The problem with consistently taking credit for new all-time market highs is that you have to take equal blame for what may end up being one of the biggest-ever percentage declines from those highs in an election year. It's certainly not necessarily Trump's fault and if coronavirus is still around on Election Day then it may provide a convenient excuse for the decline. However, it is more likely that by November 3, 2020 coronavirus will have become a nagging background issue rather than continued headlines and that there will be several other reasons cited for weakness in U.S. equity markets. That will be especially true if we enjoy a multi-week rebound which I will expect will begin very soon time-wise.

Gold mining and silver mining shares have probably already completed key higher lows to point the way higher for commodity-related and emerging-market securities.

During the last bear-market bottoming cycle gold mining and silver mining shares mostly completed their respective nadirs at or near the opening bell on October 24, 2008. Most other commodity producers and leading sectors including semiconductors did so around November 20, 2008 while many other assets bottomed during the first quarter of 2009. It is likely that gold mining and silver mining shares were again among the earliest sectors to complete their coronavirus-inspired lows with GDXJ slumping to 35.25 on February 28, 2020 and making several higher lows thereafter. This has been followed by other commodity-related and emerging-market funds beginning to form additional higher lows with energy as usual being one of the last sectors in this category to rally strongly. Insiders continue to point the way by persistently buying into the lowest valuations with energy shares enjoying especially intense insider accumulation.

VIX keeps surging toward and occasionally above 50 but will not likely be able to remain above such levels for an extended period of time.

Fear is a powerful human emotion but it is not easily sustained. Whenever VIX is spiking as it has been doing lately it is warning that any stock-market downturn is likely to soon lead to an impressive intermediate-term rebound. I expect most global risk assets to enjoy uptrends which will be highly choppy but will generally last for at least several weeks until VIX is once again around 17, 16, 15, or perhaps even lower than that. If investors would learn to sell whenever VIX is forming key higher lows as it had done in February 2020, rather than when VIX is topping out as it is doing now, then they would enjoy far greater long-term success.

Buying on Monday morning has often been a successful strategy as weekend warriors upset by recent losses and above-average volatility finally surrender and place massive market sell orders which will be triggered at Monday's opening bell--an ideal time to add to your long positions.

The U.S. dollar index has quietly begun a two-year downtrend from a three-year top.

The U.S. dollar index rallied to 99.910 on February 20, 2020, its highest point in three years and not far below its zenith from the beginning of 2017, and has since formed numerous lower highs. The greenback will continue to choppily decline for perhaps two years and will eventually complete multi-year bottoms versus many global currencies. This process will encourage rising U.S. inflationary expectations which when combined with already-committed stimulus and foolishly-conceived interest-rate cuts will prove to be a potent reflating cocktail.

Summary: the biggest profits are made by taking the opposite side of the most extreme overreactions. We now have more such simultaneous extremes than probably at any time since the first several weeks of 2016.

When I wrote my last update in early February 2020 investors saw no urgency in selling and were eager to keep piling into the most popular technology shares when it was essential to aggressively reduce risk. Now when we have multi-decade lows for many sectors people are eager to sell rather than to capitalize upon numerous compelling buying opportunities. Most investors will keep buying high and selling low because they are subconsciously responding to media hype coaxing them not to miss out when prices are topping and to bail out from fear of further losses when prices are bottoming. In the long run the U.S. equity bear market which began with the Russell 2000's zenith on August 31, 2018 will continue for perhaps a few more years, but since so many are gloomy today we are going to enjoy a multi-week rebound. You will know when to start selling again whenever VIX has slid down into the mid-teens again and the media are telling you why you should get back into the market.

The bottom line: buy whatever the top corporate insiders are buying.

Most investors currently detest energy and travel shares while insiders have been eagerly buying them into weakness. You can guess which of those groups will again be on the right side of the market.

Disclosure of current holdings:

From my largest to my smallest position I currently am long GDXJ (some new from late February), 4-week U.S. Treasuries yielding 0.939%, the TIAA-CREF Traditional Annuity Fund, SIL, XES (some new), ELD (some new), FCG (some new), OIH (some new), PSCE (some new), bank CDs, money-market funds, GDX, I-Bonds, SCIF, MTDR (some new), URA (some new), PAK, EPOL, ECH, COPX (some new), REMX (some new), LIT (most sold), EZA (most sold), GXG (most sold), ASHS (most sold), ASHR (most sold), SEA (most sold), VNM (most sold), TUR (most sold), FXF, EGPT, GOEX, BGEIX, NGE, FXB, AA (some new), EWM, RGLD, WPM, SAND, SILJ, CCL (all new), SLX (most sold), FM (most sold), ARGT (most sold), EWW (most sold), RSXJ (most sold), GREK (most sold), and CHK. I am completely sold out of HDGE, EWU, EWG, EWI, EWD, EWQ, EWK, EWN, WOOD, EPHE, JOF, AFK, and IDX.

I have again reduced my short positions to a very small short position in XLI, a small short position in SMH, and a very small short position in CLOU. My cash and cash equivalents including bank CDs and stable-value funds (fixed principal, variable interest) comprise 25.5% of my total liquid net worth.

"Those who cannot remember the past are condemned to repeat it" (George Santayana). "Those who can remember the past but insist that it's different this time deserve to repeat it" (Steven Jon Kaplan).

The two previous longest bull markets in U.S. history occurred as follows: 1) from August 1921 through September 1929 which was followed by a bear market of over 34 months from September 1929 through July 1932; and 2) from October 1990 through March 2000 which was followed by a bear market of 30-31 months in duration (exactly 31 for the Nasdaq). The current lengthy bull market which began for the S&P 500 on March 6, 2009 and which may have ended for that index on February 19, 2020 might therefore last for 30-36 months, implying a bottom around the second half of 2022.

Because there is so much gloom and doom today expect a multi-week rebound for stocks and corporate bonds worldwide over the next several weeks. Buy now and don't sell again until VIX is back down to the mid-teens.

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” --Charles Mackay (1841)

MARKET MURDER MYSTERY (February 2, 2020): One feature of the global financial markets since the internet became popular in the mid-1990s has been an unusual concentration of irrational extremes in both directions. Partly this is because, with ordinary investors being able to buy or sell literally within seconds of hearing information or analysis, there is no longer any time for thought between an investor getting an idea to buy or sell and executing that idea. This encourages wild overcrowding into overly popular investments and equally illogical mass selling of out-of-favor assets. It is no coincidence that since 1996 the S&P 500 has traced a megaphone formation of higher highs and lower lows. Recently technology shares and several other sectors became their most overpriced in history with a few exceptions from late 1999 and early 2000, while energy and some other commodity-related assets have been trading near multi-year lows. Investors adore stocks like Tesla (TSLA) with price-earnings ratios near 300 while disdaining commodity-related companies with single-digit price-earnings ratios including Matador Resources (MTDR) and Alcoa (AA) which have enjoyed heavy insider buying.

How can one explain such strange divergences? Ordinary mortals have no clues, but fortunately some of our favorite detectives agreed to return from their hidden places (mostly in remote corners of town libraries) to help us in locating the suspects who created this incoherent mess. Let's see what they have to say.

Join our unexpected detective reunion.

Sherlock Holmes: How often have I said to you that when you have eliminated the impossible, whatever remains, however improbable, must be the truth? I must conclude that the invention of this fascinating internet has indeed eliminated the essential mental pause between thought and action, thereby causing humans to behave precisely as apes. Put that in your book, Watson: you have always been a man of immediate direct action. When one billion men and women of action all buy or sell before thinking it over then you get the mispriced chaos we have now.

Dr. Watson: Are you referring, Holmes, to Apple (AAPL) and Microsoft (MSFT) making ridiculous gains in recent months which has nothing to do with their fundamentals?

Sherlock Holmes: Precisely, my dear Watson. It is the triumph of instinct over intellect. I have seen it many times in my day, but this is the first time I can recall an instance of society as a whole acting so singularly. Charles Mackay was right in his "Extraordinary Popular Delusions" about people going mad in herds.

Dr. Watson: Did he not say specifically that men--not people--think in herds?

Sherlock Holmes: Excellent recall, Watson, but nowadays the fairer sex have the right and perhaps the mandate to make equally inferior trading decisions as their male counterparts. That's true women's liberation.

Miss Marple: Indeed, Mr. Holmes, I believe you are being a bit unfair to us. However, your main observation is accurate. The situation reminds me of a naughty boy I knew once in my village. Before his fifth birthday he was already taking the wings off of bugs and destroying birds' nests. Before he reached the age of majority he had already committed a few murders. And he had such a sweet angelic face too, making everyone think he was just an ordinary nice chap.

Joe Friday: Just the facts, ma'am.

Sherlock Holmes: That is most edifying, Miss Marple, but how does that relate to the global financial markets in February 2020?

Miss Marple: My inference should be clear, especially to you, Mr. Holmes. The market pretends that everything is normal and permanent when it is the opposite. Popular overpriced favorites are just beginning what will become a historic collapse, while the most-hated securities will double and triple within a couple of years.

Hercule Poirot: It is essential to use the little grey cells, n'est-ce pas? Investors should be doing what the insiders are doing and the opposite of what the unwashed masses are doing. Instead they have it backwards. C'est dommage.

Captain Hastings: Now look here, Poirot, I just bought some of those newfangled technology shares for my own account. Are you telling me I shouldn't have done?

Hercule Poirot: It is not for me to play the fortuneteller, mon ami, but alas I see some losses in your future. You must recall how your last dozen or so ventures panned out in the end.

Captain Hastings: Just bad luck each time, Poirot. Surely it's different this time: the Fed, Brexit, the Chinese virus, Trump, . . . .

Hercule Poirot: There's nothing new under the sun, Hastings.

Dr. Watson: I personally experienced violent conflicts in the days of the British Empire but I couldn't have imagined this strange Brexit phenomenon. What's next? Is Scotland going to break away from the United Kingdom?

Sherlock Holmes: Actually that is a distinct possibility, my dear Watson, as regrettable as that would be. More relevantly, we must stop thinking about the future as an extension of the recent past. If the stock market on the other side of the Atlantic regresses to its average bear-market bottom then this will imply a loss of more than 70% from top to bottom for the S&P 500 Index.

Dr. Watson: I don't know that index, Holmes. I always heard about the Dow Jones Industrial Average.

Sherlock Holmes: Indeed the antiquated Dow Jones index, idiosyncratically modified, remains with us, Holmes, for better or for worse. That one will probably also drop 70% from its recent top, as unlikely as that would seem to most investors who have not studied history. There is a lesser-known index called the Russell 2000 consisting of U.S. companies 1001 through 3000 by market capitalization; in spite of large-cap indices frequently setting new highs since August 31, 2018, the Russell 2000 and the S&P 5mallCap 600 have never surpassed their zeniths from that day.

Dr. Watson: Is there a reason that would be meaningful, Holmes?

Sherlock Holmes: The worst American bear markets have always begun that way.

Hercule Poirot: Plus ça change, plus c'est la même chose, eh, Holmes? Our thoughts are very much alike on this subject.

Inspector Clouseau: I am searching for the clues in the room. Where is the scene of the crime?

Sam Spade: So sorry, sweetheart. I think you missed your train a long time ago. It's a tough world out there and there's no room for sugarcoating the truth. The assets everyone loves are going down, hard. My pals and I are buying up what no one seems to want, because they have no idea what they should be looking for.

Dr. Watson: I don't believe we've been formally introduced. Call me Watson. What is it that your "pals" are buying?

Sam Spade: I keep it simple. Energy. Mining. Base-metals production. Emerging-market government bonds. With a martini chaser and a broad.

Captain Hastings: I still don't see what you all have against technology. What's wrong with investing in something I can't possibly understand?

Hercule Poirot: It's not technology that's the problem, per se, but the fact that investors are willing to pay far too much for each dollar of technology earnings. I can't bring myself to say "euro" without blanching. Energy's share of the S&P 500 is below 4%--it was above 16% in the summer of 2008. Except for gold mining and silver mining shares which have been strong for over four years, and a few environmentally-trendy companies, most commodity-related assets have been given up as hopeless. Sensationnel.

Lieutenant Columbo: Mrs. Columbo was telling me just the other day that so many people we know seem to have their money in U.S. index funds these days. We're boring--we have everything in bank CDs and money-market funds.

Sam Spade: Boring is underrated.

Lieutenant Columbo: Maybe when everyone else asks me about how much interest we're getting, it will be time to buy some of those stock index funds.

Captain Hastings: You can hang up your raincoat near the door, sir. Usually everyone agrees with me--I'm not used to so much contrarianism.

Hercule Poirot: Indeed we live in a world of many Hastings and few Poirots. Tel est le monde. I am enjoying the challenge. Épatant.

Lieutenant Columbo: [whistling "This Old Man"] Come here, dog, and meet all these nice detectives.

Captain Hastings: Keep your raincoat, then. Don't you think technology shares have unlimited potential?

Lieutenant Columbo: Does that include the potential to drop in value? No one seems to be thinking about that these days. All I hear is about fear of missing out. Seems to me that was a familiar tune from 2000 and 2007.

Hercule Poirot: With all due respect, I am probably the greatest detective in the world. But I, Poirot, have been so stupid. If I purchase some of these gas and oil shares then I won't have to spend so much time chasing these perplexing clues. Tres bien, that is what I will do.

Inspector Clouseau: I have found the clues. They are here. No, they are there. They are somewhere.

Lieutenant Columbo: Just one more thing. Where were all of you at the opening bell on Friday, January 24, 2020? That is when the latest stock-market murder occurred.

How will the bear market end? Tune in next week to find out--same contrarian time, same contrarian channel.

If we're in a true bear market for U.S. equities then we'll continue to enjoy numerous sharp short-term rallies. Don't be fooled: within a few years the S&P 500 will eventually trade 70% or more below its recent zenith which means below one thousand. Along the way commodity-related assets currently mostly sporting single-digit price-earnings ratios will likely be among the few outperformers while technology favorites with triple-digit price-earnings multiples will be among the biggest losers. Bear markets usually consist of numerous corrections interrupted by powerful rebound attempts, so intermediate-term buying opportunities may occur at various points in 2020-2021 for unknown sectors.

Investing Tip #2: when you are opening any position, gradually accumulate risk using ladders of good-until-canceled orders, not with lump-sum lucky strikes.

There is no way to know in advance how extreme any given asset will get when it is completing a topping or a bottoming process, nor is it possible to determine when the ultimate zenith or nadir will occur. Therefore you must avoid dangerously accumulating risk with lump-sum opening positions. Occasionally you will get lucky, but if you buy too much at once and underpriced assets become even more absurdly undervalued--as they usually do--then you won't have enough cash to keep steadily buying. In addition, once any security completes a major bottom it usually forms several higher lows before it rallies strongly. These higher lows should be used as opportunities to keep adding to your position. Think of investing as adding one grain of sand at a time to each pile, not a whole bag at once, and to keep gradually adding until prices become too expensive.

Perhaps the simplest way to accomplish this objective is to place a ladder of small orders, with each rung in the ladder consisting of roughly 1/1000 (one-thousandth) of your total liquid net worth. Each order can be placed roughly 1% apart from each other order. If an asset worth buying keeps dropping in price, you will buy more of it each time it falls another 1%. If the security rebounds, then you can replace orders which were already filled with identical orders at the same prices and quantities, so that if there is another pullback then you will gradually buy more of it into weakness. This is how many top corporate insiders and market makers accumulate their positions.

The basic idea is that a topping or bottoming pattern is usually a process, not an event. Instead of trying to use magic market timing or mystically guessing when a top or bottom is occurring, gradually scale into any position in which you are increasing your risk.

Summary: a surprising number of assets are either far below or far above fair value.

Today we have numerous energy and related commodity securities trading at less than half fair value while many other assets including U.S. equity indices and coastal real estate remain at roughly double fair value. Mean regressions are often unexpected and especially disruptive events because too many investors are anticipating that the trends of recent years will continue even though they have already been reversing.

The bottom line: keep buying commodity-related securities into extended weakness and keep selling overpriced assets into strength.

The next two or three years will likely be accompanied by a massive shift away from the biggest winners of recent years into the most notable losers. This process is barely underway so there is plenty of time to double or triple your money by capitalizing upon it.

Disclosure of current holdings:

From my largest to my smallest position I currently am long GDXJ, 4-week U.S. Treasuries yielding 1.573%, the TIAA-CREF Traditional Annuity Fund, SIL, XES (some new), ELD, FCG (some new), OIH (some new), PSCE (some new), bank CDs, money-market funds, GDX, I-Bonds, SCIF, MTDR (some new), URA (some new), PAK, EPOL, ECH, COPX, REMX, HDGE, LIT (most sold), EZA (most sold), GXG (most sold), ASHS (most sold), ASHR (most sold), SEA (most sold), VNM (most sold), TUR (most sold), FXF, EGPT, GOEX, BGEIX, NGE, FXB, EWM, RGLD, WPM, SAND, SILJ, AA (brand new), SLX (most sold), FM (most sold), ARGT (most sold), EWW (most sold), RSXJ (most sold), GREK (most sold), and CHK. I am completely sold out of EWU, EWG, EWI, EWD, EWQ, EWK, EWN, WOOD, EPHE, JOF, AFK, and IDX.

I have a significant short position in XLI, a slightly larger short position in SMH, and a moderate short position in CLOU. As always, my short positions are notably smaller than my more meaningful long positions. My cash and cash equivalents including bank CDs and stable-value funds (fixed principal, variable interest) comprise 33.5% of my total liquid net worth, continuing to retreat from a two-year high as I have been persistently purchasing energy shares especially into early morning weakness.

"Those who cannot remember the past are condemned to repeat it" (George Santayana). "Those who can remember the past but insist that it's different this time deserve to repeat it" (Steven Jon Kaplan).

I expect the S&P 500 to eventually lose more than 70% of its value from its all-time top, whether that level has or hasn't already been reached, with its next bottoming pattern occurring with frequent sharp downward spikes perhaps during the second half of 2022. During the 2007-2009 bear market, most investors by Labor Day of 2008 still didn't realize that we were in a crushing collapse, and I expect that by early 2022 many Boglehead investors will stubbornly persist in believing that the U.S. equity bull market is alive and well. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and most other small- and mid-cap U.S. equity funds have persistently underperformed their large-cap counterparts except before sharp rebounds and have never surpassed their zeniths from that day; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, 2000-2002, and 2007-2009. The Nasdaq has completed a historic double top with its March 10, 2000 zenith in inflation-adjusted terms. A 70% loss from its recent zenith would put the S&P 500 near one thousand and I expect it to go even lower than that by some unknowable percentage. Eventual widespread fear over how much further prices will drop is likely to be accompanied by all-time record investor outflows from most U.S. equity index funds and U.S. high-yield corporate bond funds before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits in recent years; the incredibly long bull market has left them completely unprepared for a bear market. The behavior of the global financial markets since August 31, 2018 has been incredibly similar to the behavior in the early stages of nearly all major U.S. equity bear markets going back to the 1790s. In general, U.S. equity bear markets are far more alike than U.S. equity bull markets. Die-hard Bogleheads will probably resist selling until we are approaching the next historic bottom, but when they are perceived to be blockheads and become disillusioned by their method they will become some of the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value their fund managers will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect. The Boglehead foolishness is especially ironic since Jack Bogle himself aggressively sold U.S. equities in 2000 and again in 2018 shortly before his passing.

Here is the rationale between my timing guess of the next bear-market bottom for U.S. equity indices: the two previous longest bull markets in U.S. history occurred in 1921-1929 which was followed by a bear market of over 34 months from September 1929 through July 1932. The other long bull market was from October 1990 through March 2000 which was followed by a bear market of 30-31 months in duration (exactly 31 for the Nasdaq). The current lengthy bull market which began for the S&P 500 on March 6, 2009 and which may have ended for that index on January 22, 2020 might therefore last for 30-36 months, implying a bottom around the second half of 2022.