“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.

“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.