"At some price, an asset is a buy, at another it's a hold, and at another it's a sell." --Seth A. Klarman

2023 ALL-TIME DANGER (May 3, 2023): In 2021 we achieved especially dangerous all-time record unprecedented investor behavior. In the U.S. we had greater net inflows into U.S. equity funds in 2021 than in 2001 through 2020 combined. We also experienced all of the following all-time record extremes from early 2021 through early 2022: 1) the ratio of the total dollar volume of insider selling divided by the total dollar volume of insider buying; 2) the ratio of the top 50 U.S. companies by market capitalization relative to the entire U.S. stock market; 3) the ratio of the total market capitalization of the top 50 U.S. companies relative to the total U.S. GDP; 4) the overall valuation of the top 50 U.S. companies relative to the total market capitalization of the the rest of the world; 5) the total volume of call buying; 6) the average daily net inflow into U.S. passive large-cap equity funds; 7) the divergence in behavior between the most-experienced investors who had never been heavier net sellers especially of the biggest U.S. company shares, versus the least-experienced participants who had never been more aggressive net buyers of U.S. equities.

This article on Bloomberg from November 25, 2021, which doesn't even include the huge net inflows from the past several weeks of that year, highlights how investors became far too heavily committed to U.S. stocks at the worst possible time in history:

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

2023 has smashed all previous U.S. large-cap stock-market extremes including those of 2021 and 2022.

It was truly amazing to have all of the previous extremes surpassed for all previous U.S. large-cap equity bubbles including 1837, 1873, 1929, 1973, and 2000. I was convinced that we might never see such overenthusiasm, overinvesting, and overcommitment to the biggest U.S. stocks for another century or more. However, it didn't take a century to revisit these all-time distortions, as every single one of the above all-time records from 2021-2022 was surpassed in 2023.

Practically every week we get a new all-time record or two: 1) the lowest VIX (15.53) during a bear market; 2) the longest rebound from an intermediate-term bottom during a bear market (nearly 7 months); 3) frequent record ratios of the biggest U.S. megacap shares relative to the rest of the S&P 500 or relative to other indices of small- and mid-cap U.S. shares. The last statistic is especially ominous, since the degree of overcrowding into the biggest U.S. companies has consistently been proportional to the subsequent total percentage losses for the best-known U.S. equity indices and funds. The following three charts highlight the astonishing enthusiasm for the biggest U.S. companies in recent weeks:

If U.S. Treasuries are paying over 5% guaranteed with the interest exempt from state and local income taxes, how can other investments compete?

The simple answer is that on a rational or analytical basis there is no reason to purchase U.S. stocks, real estate, art, collectibles, or anything else if you can get 5% or more on U.S. Treasury bills. Only emotional reasons would justify purchasing fluctuating assets, especially since so many of those are trading near all-time record overvaluations and as described earlier in this update have rarely been more popular.

The 17-week U.S. Treasury bill usually sports among the highest yields of all U.S. Treasuries since it has only existed since October 2022 and many institutions aren't aware of it. This is a far more intelligent choice than putting money into absurdly-overpriced U.S. large-cap equity funds including QQQ, XLK, and SPY.

The U.S. Federal Reserve is trying to slow the U.S. economy. Do you really think they'll fail in that pursuit?

The U.S. Federal Reserve has just raised both of its key overnight lending rates by a total of five percent over a relatively short time period in order to slow the U.S. economy. Regardless of whether there is a soft landing or not, current valuations especially for the largest U.S. stocks aren't compatible with contracting economic growth. We don't need to have a recession in order to have a stock-market crash, since merely returning to fair value will produce massive percentage losses. Moreover, bear markets almost always bottom at a 30% to 50% discount to fair value.

Gold mining and silver mining shares are often among the earliest assets to complete both tops and bottoms in any cycle. History always repeats itself with minor variations.

Even though the price of spot gold almost exactly revisited its all-time high from August 2020, the prices of gold mining and silver mining shares remained dramatically below their peaks from that month. This served as an important negative divergence to warn us that, even though this sector is traditionally one of the strongest bear-market performers, for some period of weeks or months we are going to experience a meaningful correction in this sector which has been underway since April 13, 2023.

Funds including GDXJ and GDX are likely to complete their bottoms ahead of nearly all other risk assets over the next several months. Gold has repeatedly failed to remain above 2050 U.S. dollars per troy ounce, including a failed attempt on Wednesday, May 3, 2023, and will likely drop below 1800 before resuming its long-term uptrend which has been in effect since the beginning of this century. After gold mining and silver mining shares complete their pullbacks and begin to rebound, the clock will be ticking for most other stocks which will fall to multi-year lows over the subsequent several weeks or months.

The biggest losses for U.S. stocks will be in 2024-2025, not in 2023. However, we are going to drop a lot more in 2023 than even many bearish analysts are anticipating.

In 2024-2025 U.S. stocks are likely to return to their levels of 2013 and perhaps even 2012. In 2023 we generally won't approach or drop below most of the March 2020 bottoms, because it's not yet timely for such an event to occur. Bear markets are like avalanches: they start out slowly and build up momentum on the way down. All pullbacks are followed by powerful recoveries, each of which convinces most investors that the bear market is over and we're in a new bull market. If you don't believe this then check how many times during the past 1-1/2 years Jim Cramer has insisted that the bear market has ended. Each time he and many other analysts became convinced that "the bear market is over", a renewed, ferocious downturn ensued.

A reasonable 2023 downside target for QQQ would be 200 or 190, and I think we will go lower than that before the end of this calendar year. This should be followed by a rebound of perhaps 40% over a period of several months, after which we will begin a much more severe downtrend.

U.S. equity indices keep making upward spikes as is characteristic of an intermediate-term topping pattern in a bear market.

QQQ briefly surged to intraday highs of 323.63 on May 1, 2023 and 322.47 on May 3, 2023. Topping patterns within bear markets feature repeated attempts to stage upside breakouts, just as bottoming patterns within bear markets are accompanied by repeated sharp downward moves. Investors tend to be easily fooled into believing that repeated upward intraday surges are bullish when they are profoundly bearish.

VIX fell to 15.53 at 11:02 and 11:03 a.m. on Monday, May 1, 2023 for the first time since November 5, 2021.

In past bear markets, multi-month low extremes for VIX were an important sell signal. Similarly, when VIX climbs to a multi-year high and then begins to form lower highs, as I think will be the case much later in 2023, this is a useful buy signal for U.S. equities and their funds.

Investors are repeating the same recency-bias mistake as the Fed had done in 2020.

Why did the Fed wait so long before starting to increase overnight lending rates? Didn't they notice that the U.S. stock market was approaching record bubble levels near the end of 2020? Of course they did, but the deciding factor in not raising rates at that time or in early 2021 was because we hadn't experienced a true inflationary binge since the early 1980s which was forty years earlier. If something hasn't happened for a long time, you start to believe that it's highly unlikely to reoccur even if it is by far the most probable outcome.

Investors are making the same serious mistake today. They're not putting most of their money into U.S. Treasury bills, in most cases not because they aren't aware how overpriced megacap U.S. shares are today (although some are simply ignorant), but because we haven't experienced a crushing bear market since early March 2009 which was more than 14 years ago. Anything which is that far in the past seems psychologically as though it can't happen again, even though it is by far the most likely outcome.

The U.S. dollar index has been making higher lows since early 2021. The correction from the last week of September 2022 essentially ended at the beginning of February 2023 and we have been experiencing higher lows in preparation for a dramatic move higher for the greenback over the next several months.

I keep reading about how I should invest in anticipation of a falling U.S. dollar. As with most media coverage this is badly misguided. One of the major risks to the global economy is that the U.S. dollar, which reached its highest point in September 2022 in more than twenty years, is likely to achieve a 40-year zenith within two or three years. Bet on a rising U.S. dollar, not a falling one.

Investors are overly concerned about commercial real estate and are not nearly concerned enough about residential real estate.

Work-at-home popularity in recent years, encouraging companies to lease significantly less office space, has become widely broadcast and Charlie Munger was recently featured as highlighting this point. This phenomenon is probably more than built into current valuations for commercial real estate and associated REITs. Investors are ignoring the far more dangerous all-time record ratios of residential real estate in most neighborhoods to the average household incomes in those neighborhoods. Eventually residential real estate, like all other assets, must regress to fair value as measured by the average long-term ratios of housing prices to household incomes. This implies a 50% average decline for houses in most U.S. cities over the next few years if you don't adjust for inflation. If U.S. stocks end up mostly completing historic nadirs in 2025 then real estate might complete its bottoming process in 2025-2027 as residential housing prices tend to retreat to important lows a year or two later than the equity market.

The bottom line: 2023 has experienced even more dangerous extremes than 2021 or 2022, and those had been among the most-overvalued episodes in U.S. history for large-cap U.S. equities.

We can debate how much lower QQQ, XLK, and similar assets are likely to drop over the next 1-1/2 to 2-1/2 years. I feel pretty confident that QQQ will eventually trade below 80 which would not even be as large a total percentage decline as its 83.6% collapse from its March 10, 2000 top to its October 10, 2002 bottom. This would represent a slide of 75% for QQQ from its current level. Other funds which are laden with heavy weightings in the largest U.S. companies will suffer proportional declines.

Disclosure of current holdings:

Below is my current asset allocation as of 4:00 p.m. on Monday, May 1, 2023.

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

TIAA(Traditional)/VMFXX/FZDXX/Savings/Checking long: 26.44%;

26-Week/17-Week/52-Week/2-Year/8-Week/3-Year/5,10-Year TIPS long: 13.02%;

I Bonds long: 9.35%;

TLT long: 9.04%;

XLK short (all shorts are currently unhedged): 21.45%;

QQQ short: 8.74%;

XLE short: 4.59%;

XLI short: 2.37%;

XLV short: 1.62%;

SMH short: 0.69%;

GDXJ long: 11.45%;

ASA long: 7.33%;

GDX long: 3.25%;

BGEIX long: 1.59%;

Gold/silver/platinum coins: 6.10%;

HBI long: 0.31%;

EWZ long: 0.20%;

EWZS long: 0.08%;

PAK long: 0.02%;

EGPT long: 0.01%.

The numbers add up to more than 100% because short positions only require 25% to 30% collateral in stocks/funds and less than that in U.S. Treasuries (by SEC regulations; some brokers require more) to hold them with no margin required.

"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.

“It’s not always easy to do what’s not popular, but that’s where you make your money.” --John Neff

BEARISH ROTATION (August 16, 2021): The media have featured numerous articles about how there has been a rotation among equity sectors. However, the assumption which underlies almost all of these analyses is that we are in a bull market and that the sequential pattern will lead to continued gains. Few analysts have noticed that the pattern of relative performance between assets in 2021 is most similar to years including 1928-1929, 1972-1973, 1999-2000, and other years which preceded major percentage losses for the U.S. stock market.

Numerous multi-decade extremes support a bearish conclusion for U.S. equities.

2021 has featured an all-time record ratio of the total U.S. dollar amount of selling by top corporate executives relative to their buying. We had more money flowing into U.S. equity funds since November 2020, a period of 9-1/2 months, than during the previous twenty years combined:

Inflows Into Equity Funds Smash Records

Reliable historic valuation measures including Tobin's Q and the Rule of 20 demonstrate that 2021 reached considerably more extreme average U.S. equity valuations than previous historic peak periods going all the way back to the late 1700s:

Throughout 2021 we have had one equity sector after the other beginning a major downtrend in roughly the same sequence as it had done in the early months of previous major percentage declines.

In 2007 small- and mid-cap baskets of U.S. stocks including IWC had topped out on June 1 while QQQ and the Nasdaq reached their highest points on October 31 which was five months later. In 2021 we had IWC and IWM completing their highest intraday levels on March 15 which would suggest that we are right on schedule for the early stages of what could eventually become a full-fledged U.S. equity bear market. The past doesn't exactly repeat itself each time but the parallels are far closer than most investors appreciate until afterward.

Nearly all emerging-market bourses have begun downtrends between several weeks and several months ago. Energy shares and nearly all commodity producers have mostly also been in downtrends for weeks or months, in some cases already suffering notable percentage declines. The trendiest assets including TAN (solar energy) and TSLA mostly completed their highs early in 2021. We are frequently getting more new 52-week lows than 52-week highs for the Nasdaq even though the Nasdaq Composite Index remains very close to its all-time zenith, thus repeating a classic divergence which has marked U.S. equity topping patterns for decades.

In a bear market gold mining shares tend to be among the earliest sectors to complete their bottoming patterns.

Not many investors pay attention to precious metals and their producers, but funds including GDX and GDXJ had completed 7-1/2-year peaks on August 5, 2020 and entered downtrends which persisted for more than one year. During the 2000-2002 bear market gold mining shares (see HUI) were among the earliest assets to complete their lows on November 15-16, 2000, almost two years ahead of the Nasdaq's October 10, 2002 nadir. Gold mining shares (GDX) later completed an important bottom near the opening bell on October 24, 2008 while the S&P 500 didn't complete its final 666.79 low until March 6, 2009. Last year both GDX and GDXJ had bottomed on March 13-16, 2020 while most U.S. equities touched their lowest points on March 23, 2020. It is likely that the corrections for GDX and GDXJ, whether they are complete or not, will be followed over the next several months by key intermediate-term bottoms for nearly all equity sectors.

Bear markets tend to experience about half of their total losses during the first several months.

QQQ plummeted from a dividend-adjusted top of 104.99 on March 10, 2000 to 17.22 on October 10, 2002, a total loss of 83.6%. Very few remember the severity of this pullback which is likely to be repeated within the next few years, and even fewer investors recall that QQQ had lost 40% of its March 10, 2000 valuation by its intraday dividend-adjusted low of 62.95 on May 24, 2000. In similar fashion, the bear market which began from a similar top in 1929 had experienced roughly half of its total losses over a relatively short number of months.

Even investors who recognize stretched overvaluations and recognize the dangerous implications over the next few years are mostly complacent or bullish about the next several months when the downside risk may be especially elevated. Here is a chart of the 2000-2002 plunge for QQQ:

The previous pandemic featured a strong bull market followed by a severe bear market. A repeat is likely.

It is probably relevant that the bear market which began near the end of the previous pandemic on October 31, 1919 (the same calendar date as QQQ's top in 2007), and which continued for a total of 22 months, had completed about half of its total decline within less than four months by February 1920.

The bottom line: we have a sector rotation for U.S. equities which closely resembles the early months of several past severe bear markets. Good bargains will tend to occur earliest for those sectors which tend to bottom first, including gold mining and silver mining shares. Caution is warranted since the initial decline is often roughly half of the total bear-market loss and because U.S. stock-market valuations overall have never been higher. Near all 2021 peaks we have experienced both aggressive insider selling relative to insider buying along with all-time record equity fund net inflows, thereby confirming that the risk of being heavily invested today is highest when it is widely perceived to be lowest.

Disclosure of current holdings:

Here is my asset allocation with average opening prices adjusted for all dividends: 49.5% cash including TIAA Traditional Annuity paying 3% to 5% (only available for legacy retirement accounts) and Discover Bank high-yield savings paying 0.40% (available for all U.S. residents with retirement and ordinary savings accounts); 19.9% short XLK (112.7737); 17.8% long TLT (148.59); 16.8% short QQQ (301.724); 7.2% short TSLA (494.9721); 6.2% long GEO (7.65); 3.1% long GDXJ (43.826); 1.8% short ZM (293.16); 0.9% short AAPL (125.5481); 0.6% short IWF (223.0119); 0.5% short SMH (170.7813); 0.3% long UGP (2.94). It doesn't add up to 100% since short positions require less cash; there is no margin involved.

“Don't panic. The time to sell is before the crash, not after.” --John Templeton

CRACK CRUMBLE CRASH (May 17, 2021): There are all kinds of theories about why U.S. stocks reached all-time record overvaluations in 2021: the Fed, coronavirus, zero commissions, near-zero bank interest rates, and widespread popularity of trading. While these all have kernels of truth the real reason U.S. stocks are so overpriced is that investors poured more money into U.S. stocks during November 2020 through March 2021--just five months--than during the entire remainder of the bull market which had begun in March 2009:

Investors Have Put More Money into Stocks in the Last 5 Months Than the Previous 12 Years Combined

In addition to cleaning out their bank accounts and selling "boring" bonds so as to "not miss out" in the U.S. stock market, investors have borrowed all-time record amounts of money via margin loans as you can see from this chart of margin debt vs. GDP since 1959:

Downtrends have already begun for key leading sectors.

In any major bear market certain sectors tend to begin declines ahead of most other sectors. These tend to include small-caps (IWC), semiconductors (SMH), emerging market (EEM), and biotech (BBH). All of the above sectors had peaked weeks ago and have formed several lower highs since then. We also experienced the highest-ever ratios of insider selling to insider buying in U.S. dollar terms, a complete reversal from March 2020 when we had enjoyed the highest ratio of insider buying to insider selling since March 2009.

Notice the stark inversion from March 2020 to May 2021:

March 26, 2020: Executives Are Buying Stock in Droves, Giving a ‘Strong’ Signal That the Comeback Is for Real

May 14, 2021: Billionaires Are Selling Mega-Sized Stock Blocks After Surge

The following chart highlights how insider selling relative to insider buying has soared in recent months:

The media and analysts have shifted from expectations of essentially no inflation at the beginning of November 2020 to permanently-surging inflation by May 2021.

A half year ago the media, if they bothered to mention inflation at all, was about how it wouldn't be a problem for several years--if ever. In recent weeks inflation has been cited as one of the key factors in the global financial markets. It is almost certain that the media, along with most analysts and advisors, are just as wrong now as they were a half year ago but in the opposite direction. There is a long-term rising trend for inflation and interest rates worldwide which began in March 2020 but now that almost everyone is preparing themselves for higher inflation we are almost certain to move the opposite way for at least several months. Here is a refreshing contrarian viewpoint on this critical topic:

Greasing the Slide Toward Deflation

The insiders and commercials are clearly pointing the way forward while almost no one is paying attention to them.

Insiders of companies which would benefit from rising inflation, such as non-precious-metals commodity producers, industrials, and the shares of major global exporters, have experienced their highest insider selling in decades. At the same time we have all-time record traders' commitments in inflation-loving currencies such as the Canadian dollar in which commercials--who are the insiders for futures trading--have never been more aggressively net short:

Current Traders' Commitments, Canadian Dollar at Record 5-11-2021

It's a long way to Tipperary, not to mention the bottom for nearly all asset classes.

From its dividend-adjusted zenith of 104.99 on March 10, 2000 to its 17.22 bottom on October 10, 2002, QQQ plummeted 83.6%. With even greater net inflows by average investors and all-time record selling in 2021 by top corporate insiders it is likely that the current bear market for QQQ will end up experiencing similar or greater total percentage losses within three years or less. Hardly anyone is protecting themselves against such a possibility, which might even be the most probable scenario, by hedging, selling short, or even moving to a greater cash allocation. For the first time in history more puts were sold to open--that is, to make money betting on the stock market not declining much in percentage terms--than bought to open as a form of portfolio insurance. We have also experienced all-time record levels of small speculative call buying in 2021.

The total volume of short selling relative to market capitalization reached an all-time record low below 1.5% at the beginning of spring 2021:

The total percentage losses for unproven asset classes like cryptocurrencies and NFTs can't even be estimated, but the top-to-bottom declines for most of these will probably exceed 99%. Investors are far too easily swayed by well-known personages like Elon Musk rather than carefully considering the intrinsic merits of such speculations.

The bottom line: increasing negative divergences are pointing the way lower for U.S. equity indices in both the intermediate (3 to 6 months) and longer term (2 to 3 years) with periodic sharp upward spikes that are typical in all severe bear markets.

As the media have been maximally bullish and investors have smashed all previous net inflow records in their anticipation of higher asset valuations for U.S. stocks, corporate bonds, cryptocurrencies, real estate, collectibles, NFTs, and just about everything else, insiders and commercials and those with the most knowledge have never been more aggressive sellers. Do you think the world's wealthiest and most-experienced investors will be those who triumph over the next few years or the masses who have no idea what they are doing? There's a reason that the rich get richer and the poor remain poor. Otherwise we'd have mostly wealthy neighborhoods and a few scattered pockets of poverty rather than the other way around. It's not different this time.

Resist the temptation to become a rhinoceros, I mean a Boglehead, and remain heavily in cash.

It's time to hit an inside-the-park home run.

While you're patiently waiting for global assets to collapse you might enjoy watching a comedy I wrote in these euphoric times:

Inside-The-Park Home Run

Disclosure of current holdings:

Each time QQQ has been near or above 340 I have gradually increased my short position in that fund which had plummeted 83.6% from its January 10, 2000 top to its October 10, 2002 bottom including all reinvested dividends and will likely experience a similar top-to-bottom loss by 2024 or sooner.

Here is my asset allocation with average opening prices adjusted for all dividends: 57.0% cash including TIAA Traditional Annuity paying 3% to 5% (only available for legacy retirement accounts) and Discover Bank high-yield savings paying 0.40% (available for all U.S. residents with retirement and ordinary savings accounts); 18.4% short XLK (112.7737); 16.8% long TLT (148.59); 12.3% short QQQ (296.3402); 7.4% short TSLA (494.9721); 4.5% long GEO (7.898); 1.9% short ZM (293.16); 1.4% long GDXJ (44.6462); 0.9% short AAPL (125.5481); 0.6% short IWF (223.0119); 0.5% short SMH (170.7813). It doesn't add up to 100% since short positions require less cash; there is no margin involved.

“Investing should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” --Paul Anthony Samuelson

INVESTING WHILE INTOXICATED (January 17, 2021): We have experienced all-time record levels of speculative call buying, penny-stock chasing, massive percentage increases for marginally-profitable companies, IPO eagerness, and numerous other multi-decade and even multi-century records which in many cases have surpassed rare bubble extremes from periods like 1928-1929, 1972-1973, and 1999-2000. Far too many investors have embraced the perceived certainty of ever-rising asset valuations, resurging inflation, a slumping U.S. dollar, endless summer for cryptocurrencies, record-low spreads for high-yield corporate bonds over U.S. Treasuries, the second real-estate bubble of the 21st century, and other myths as though they were certainties. The most remarkable feature today is how few people recognize it as being both phenomenally extreme and completely unsustainable. All similar bubbles in past centuries have ended with nearly identical collapses and this is not going to be the first-ever exception to that rule.

The large-cap Nasdaq collapses of 1973-1974 and 2000-2002 are likely to be repeated along with severe losses for many other fluctuating assets.

From its March 10, 2000 peak of 105.12 to its October 10, 2002 bottom of 17.24, adjusted properly to include all reinvested dividends as StockCharts.com does, QQQ plummeted 83.6%. I expect a similar percentage decline, plus or minus several percent, within three years or less. This will likely be accompanied by notable percentage losses for high-yield corporate bonds, real estate, cryptocurrencies, art, and nearly all fluctuating assets. It won't be a smooth path down and there will be many rebounds along the way. Robinhood investors and Bogleheads will both suffer severe losses for somewhat different reasons.

Bogleheads are overreliant upon the glory of past decades.

John Bogle himself decried the existence of those who took his excellent idea about index investing and badly distorted it. John Bogle sold all of his aggressive-growth shares in 2000 and also unloaded most of his stocks shortly before his passing in 2018 because he astutely recognized that there is sometimes far too much risk in the financial markets. It's too bad that most of today's Boglehead investors haven't considered that if you had been invested in the U.S. stock market near the end of August 1929 then by August 1982--which was 53 years later--your portfolio would have lost an average of about 60% after adjusting for inflation depending upon exactly what you owned. The only true periods of dramatic outperformance for the U.S. stock market, not counting the bubble behavior since March 2020, were the incredible eight-year rally from August 1921 through August 1929 and the more recent huge bull market from August 1982 through March 2000 with a few minor bear markets along the way. Even with its huge gain in recent years, if you are long a basket of Nasdaq stocks which you have owned continuously since the peak on March 10, 2000 then you are only marginally ahead after adjusting for inflation.

People are repeatedly underinvested whenever bull-market gains are about to be greatest and dangerously overinvested near the beginning of all major downtrends.

Nearly all long-term analyses of the financial markets underrate the rarity of the atypical outsized gains of the above two periods of 8 and 17-1/2 years. They usually have an agenda, open or hidden, of creating an illusion that "stocks always go up in the long run." Actual records by brokerages and mutual-fund companies illustrate clearly that most people prior to these two major outperforming periods had historically very low allocations to risk assets; in August 1982, for example, only 13.2% of total household wealth was invested in stocks versus roughly five times that amount by early 2000. So the vast majority of investors got little benefit from the two huge bull markets of the past century while there was massive participation on the downside in 1929-1932 and 1999-2003. With everyone nearly fully invested today we are set perfectly for a massive aggregate loss of wealth over the next few years.

Safe-haven assets have quietly completed important bottoming patterns.

VIX, a measure of implied volatility, has been steadily making dozens of higher lows since the final months of 2019. The U.S. dollar index, a little-followed signal which has accurately forecast nearly all major market turns of the past half century, probably completed its lowest point since the second week of April 2018 at 90.209 at 6:30 a.m. on January 6, 2021, having made numerous higher lows during the past 1-1/2 weeks. The U.S. dollar index topped out on March 4, 2009, exactly two days before the S&P 500 began a historic surge higher, and the U.S. dollar index also completed a key peak on March 20, 2020 just before the March 23, 2020 bottom for many U.S. equity indices. In July 2008 the U.S. dollar index completed a key double bottom just before the S&P 500 suffered one of its worst-ever percentage collapses. It is probably no coincidence that the January 6, 2021 bottom for the U.S. dollar index preceded by a half week the 319.99 after-hours top for QQQ registered at 5 p.m. on January 8, 2021.

The most-experienced investors are among the few who have embraced the U.S. dollar and U.S. Treasuries.

The third of the "Three Musketeers" safe-haven trio, TLT and other long-dated U.S. Treasuries, likely completed important bottoms around noon on January 12, 2021. Top U.S. corporate executives have set new all-time records for the ratio of the total dollar amount of insider selling relative to insider buying in the U.S. stock market. These very-experienced investors have been increasingly accumulating the safest havens while they are still significantly undervalued. In every bull market the most-capable participants buy first, followed gradually down the food chain until the least-knowledgeable novices are piling in near the top. In a bear market the savviest investors get out earliest, followed all the way down the line until the least-experienced traders end up setting all-time records for net outflows near the bottom of the cycle.

Real estate worldwide is completing its second major bubble of the 21st century.

The 2005-2006 real-estate bubble featured subprime mortgages and liar loans. The 2020-2021 real-estate bubble is notable for record-low mortgage rates and the easy availability of credit and zero down payments. The most important similarity between 2005-2006 and 2020-2021 is that the ratio of U.S. housing prices to average household income in both cases surpassed twice their long-term level in many neighborhoods. Much of this data including the detailed Herengracht study which began in 1628 and Case-Shiller backdating to 1890 spans centuries (and even millennia, since real-estate prices have been recorded throughout written history). In 2005-2006 one heard frequently about how "foreign buyers" would enable real-estate prices to be perpetually elevated; by 2010-2012 many of these buyers had become sellers. Today you hear repeatedly about how people "from away" are eagerly buying but no one mentions how those with no long-term connection to a place are much less likely to hold on during periods of falling valuations. No asset which is more than double its fair value can sustain such a high price regardless of whether it's real estate, stocks, commodities, or anything else.

Intraday behavior highlights eager opening-bell buying which characterizes nearly all tops.

If you look at intraday charts of most risk assets in March 2020 then you will quickly discover that the least-experienced investors who were panicking out of the market nearly all did so near the opening bell, especially on Mondays when investors had been worrying all weekend about how much lower the market might retreat and had placed massive market orders to sell. Near bubble peaks in March 2000 and again in recent weeks we have repeatedly experienced the highest prices of the cycle near the opening bell when the least-experienced recent investors are most excited about how much money they're going to make. During the final months of 1999 and the early months of 2000 I heard many people openly predicting--in person and on the internet--how much money they would make in the stock market, with an infamous survey in February 2000 registering the average investors' expectations of 30% annualized gains in the stock market for the following decade. Recently similar absurd extrapolations have become commonplace.

Many of today's investors were in high school or younger during the 2007-2009 and earlier bear markets.

The huge surge of new investors in less than one year, just as in 1972-1973 and 1999-2000, have mostly never experienced a bear market. Many of them were in school when the last bear market occurred so it seems emotionally distant. Now they'll have a front-row seat to the carnage which will affect so many of them directly.

It's not just the newby investors who are convinced of invincibility but many long-time baby boomers who should know better.

If you look at the comments below and on my other essays on Seeking Alpha then you will quickly discover that those who are most optimistic about future risk-asset valuations are not just those who have never personally experienced bear markets. Many investors who lived through the huge collapses of 1999-2003 and 2007-2009, and who may have lost significant percentages of their net worth during those bear markets, have convinced themselves that "because of the Fed" or "since you have to put your money somewhere" or "with all of that cash still out there" or "since assets have to climb in the long run" that they're going to come out ahead even if they enter or hold their positions near their most-overvalued levels in history. All major market tops and bottoms must be accompanied by widespread delusions that a current unsustainable over- or undervalued extreme can persist indefinitely. The biggest percentage losses have always occurred whenever there was the highest level of overconfidence in future gains while the most dramatic percentage gains have happened in an atmosphere of maximum pessimism.

All post-bubble collapses have nearly identical chart patterns as Charles Mackay pointed out in "Extraordinary Popular Delusions and the Madness of Crowds" which he first published in 1841.

QQQ's pullback from its March 10, 2000 zenith of 105.12 to its May 24, 2000 intermediate-term intraday low of 63.03--with both numbers properly adjusted for dividends by StockCharts.com--was just about exactly 40%. QQQ reached 319.99 at 17:00:01 Eastern Time on January 8, 2021 which if we round off to 320 implies an upcoming bottom, perhaps in the second quarter of 2021, near or below 192. This is nowhere near what its ultimate bear-market nadir will be in 2022 or 2023 but is merely a projection for its first significant decline. Usually bear markets have their second-largest percentage losses near the beginning and their largest percentage declines near the end with lots of bounces and other unknowable fluctuations in between. Hardly anyone would likely agree with this price target with the vast majority of forecasters expecting continued QQQ gains in 2021 and beyond.

Participation in recent weeks has been concentrated in the least-reliable and most-dubious sectors of the financial markets.

The most-speculative sectors in the financial markets today have enjoyed by far the greatest increases in both participation and percentage gains, thereby encouraging many others to climb aboard these highly-uncertain assets. Penny stocks, cryptocurrencies, and out-of-the-money call options have become the darlings of recent months to an extent not even approached during past bubble peaks. Here is a chart of participation in penny stocks during the past decade:

The disappearing Trump mystique provides an emotional excuse for "huge" asset losses.

Most of the irrational increases for risk assets occurred since Donald J. Trump was declared the winner of the 2016 U.S. Presidential contest. Whether this is fundamentally meaningful or not, Trump is associated in many people's minds worldwide with wildly-overpriced assets. Now that Trump is out of favor, and soon to be out of office, this mystique has reversed. Many will subconsciously tell themselves that since Trump has gone there is nothing to prevent asset valuations from declining dramatically.

The most noteworthy aspect of the current asset bubble is how--as with every bubble peak in history--so many perceive it as being normal and sustainable when it is neither.

A few people in the media and on chat sites including Seeking Alpha have mentioned the rarities of the current situation and sometimes use the word "bubble" but most investors are convinced that nothing extraordinary is going on. A century from now, and perhaps two or three centuries from now, the current mania will be analyzed as to how it could have been created in the first place and why so many more people piled in near the top rather than prudently reducing risk. The 1929-1932 bear market might still remain as the premier historic collapse but 2021-2023 will provide some serious competition and will likely be much more closely scrutinized partly since data and analyses from the current century are far more numerous and pervasive than a bear market from a previous century of mostly mass print media. Most people have been investing while inebriated with the liquor of potentially unlimited gains, not realizing the severe hangover which is approaching.

When in doubt use the Martian test.

Suppose that you had just arrived on planet Earth from a trip to Mars where your internet connection had been broken. What looks absurd and what looks normal? If you are living through a period where the value of cryptocurrencies gradually climbs for months then you begin to accept it as being typical regardless of how high it gets. If you were thinking about selling on the way up but you didn't sell and the price climbs higher, you keep getting positive psychological feedback telling you how smart you were for waiting longer. Eventually you won't be able to sell at any price, no matter how high, since you've gotten so many pats on the back attesting to your brilliance in doing nothing. Many of the recently-minted rich from being fortunate enough to hold bubble assets have proudly declared that they're not selling a single share, thereby ensuring that they will end up poorer than when they began. I personally know several people who had suffered this fate in 1999-2003.

The bottom line: today's investors are like small animals blissfully eating by a pond, not recognizing that they are surrounded by hungry alligators.

One of the most important principles of investing is that if you are long anything and a massive concentration of inexperienced investors are joining your trade while insiders and commercials are heavily selling then you must get out regardless of what might happen in the long run. That is why I bailed out of GDXJ with an average price of 62.50 - 63.00 in the morning of July 27, 2020. Similarly, if you are short or in cash and investors are making all-time record net outflows while insiders are buying at their most intense pace in eleven years, as had occurred in March 2020, then you must buy aggressively even if you don't see any light at the end of the tunnel.

Disclosure of current holdings:

I have gradually increased my short positions in XLK, TSLA, and especially in QQQ while increasing my long position in GEO and more than quadrupling my now-substantial long position in TLT. I closed out all of my long positions in value shares; while I like many value sectors long-term I expect substantially lower prices sometime during the next half year.

Here is my asset allocation with average opening prices adjusted for all dividends: 65.7% cash including TIAA Traditional Annuity paying 3% to 5% (only available for legacy retirement accounts) and Discover Bank high-yield savings paying 0.50% (available for all U.S. residents); 18.5% short XLK (112.5968); 11.5% long TLT (154.68); 10.2% short QQQ (292.8835); 9.6% short TSLA (491.9117); 3.0% long GEO (8.76); 2.4% short ZM (293.16); 0.9% short AAPL (125.5481); 0.6% short IWF (223.0119); 0.5% short SMH (170.7813). It doesn't add up to 100% since short positions require less cash; there is no margin involved.

“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.