"When all feels calm and prices surge, the markets may feel safe; but, in fact, they are dangerous because few investors are focusing on risk." --Seth A. Klarman

LONG TREASURIES, SHORT STOCKS (September 4, 2023): In the entire history of the U.S. financial markets there has rarely been an opportunity where U.S. Treasuries were such compelling investments relative to U.S. stocks. The 6-month U.S. Treasury bill is yielding just about exactly 5.5% while the S&P 500 Index is yielding less than 1.6%, one of the greatest spreads ever recorded.

The U.S. Treasury yield curve is at all-time record inversion, meaning that the short-term U.S. Treasury bills of several months to maturity have their widest-ever spreads over longer-term U.S. Treasuries. This chart shows the spread between the 3-month and 10-year U.S. Treasuries going back to 1982:

Here is a chart showing the extreme relative outperformance of the S&P 500 Index relative to the 10-year U.S. Treasury since 1993:

The 10-year U.S. Treasury hasn't underperformed so dramatically since it was first introduced by Alexander Hamilton in 1789, the year before the 1790 debut of equities trading on the Philadelphia Stock Exchange:

Commercials in U.S. Treasuries, analogous to top corporate insiders for individual companies, have a total net long position which is roughly twice their previous all-time record going back to 1990. The maroon bars represent the commercials in the 10-year U.S. Treasury, meaning those who trade it as a necessary part of their career rather than for the purpose of speculation (special thanks to Software North):

The U.S. money supply, measured by M2, has never contracted as sharply as it has done recently, as you can see from this chart dating back to 1965:

We have also experienced the lowest prices for one-year index put options since these valuations started to be tabulated in 2008:

Investors love call options and hate put options at market peaks, while chasing after puts during all bottoming patterns. Meanwhile, most people were so excited about megacap U.S. tech shares in 2021 that total fund inflows exceeded those of 2001 through 2020 combined [not a misprint], but this record was far exceeded by the AI bubble eagerness in 2023:

U.S. equity overvaluations have never been more glaring than they were near their 2021, 2022, and 2023 peaks including July 2023:

The prices of the most popular technology companies have soared far out of line with their actual earnings:

Not all global stock markets are overpriced. U.S. gold mining and silver mining shares and their funds are moving toward undervaluations which could become compelling later in 2023, although silver's traders' commitments warn that it's too early to buy as you can see by comparing the current maroon bars with those from the leftmost part of the following graph in September 2022 which was the last excellent purchase opportunity for precious metals and the shares of their producers:

Much-hated Chinese stocks have suffered recent record net outflows and will likely be worth buying sometime during the next several months after U.S. stocks have already been in more pronounced downtrends:

The bottom line: In 2000, 2007, and 2023, we experienced the highest U.S. Treasury yields of each decade when investors were far more eager to own U.S. stocks than they were to be long "boring" U.S. Treasuries. This was followed by losses of more than half for most U.S. equities while those who had bought U.S. Treasuries were rewarded by locking in yields just before they had dropped steeply after both 2000 and 2007. It is more likely that this will occur again this time, rather than less likely, because we have a far greater degree of commercial accumulation of U.S. Treasuries now than we have experienced at any time since 1990. We also have all-time record extremes of U.S. equity call buying, the most undervalued put options, all-time record net equity fund inflows, and the lowest-ever total U.S. dollar amount of insider buying ever recorded during the past three months:

Barron's: Insiders Wave a Red Flag

Disclosure of current holdings:

Below is my current asset allocation as of 4:00 p.m. on Monday, August 28, 2023. Each position is listed as its percentage of my total liquid net worth.

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

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

VMFXX/TIAA(Traditional)bank CDs/FZDXX/FZFXX/SPRXX/SPAXX/Savings/Checking long: 31.83%;

26-Week/17-Week/52-Week/13-Week/2-Year/8-Week/3-Year/5,10-Year TIPS/4-Week/42-Day long: 17.24%;

TLT long: 9.92%;

I Bonds long: 9.53%;

XLK short (all shorts unhedged): 25.15%;

QQQ short: 12.48%;

XLE short: 5.04%;

XLI short: 2.55%;

XLV short: 1.67%;

SMH short: 0.88%;

AAPL short: 0.02%;

SARK long: 1.20%;

PSQ long: 0.01%;

ASA long: 1.26%;

GDXJ long: 0.57%;

GDX long: 0.25%;

BGEIX long: 0.00%;

Gold/silver/platinum coins: 5.69%;

PAK long: 0.03%.

“Macro worries are like sports talk radio. Everyone has a good opinion which probably means that none of them are good.” --Seth A. Klarman

SAFE HAVENS SHUNNED (June 21, 2022): Since January 4, 2022 large-cap growth funds like SPY finally joined the bear market which began in February 2021 when stocks in the U.S. and worldwide began shifting from uptrends to downtrends. It took several months longer for assets like the Nasdaq and QQQ to reach their respective peaks on November 22, 2021 at all-time record overvaluations roughly 3.75 times fair value. Whenever a popular fund like QQQ with its current fair value near 116 is trading at 408.71, as it had been at its peak on November 22, 2021, then it's like drinking an entire fifth of Scotch at one go. It might be a special single malt which has been lovingly aged for decades but you're still going to first get drunk and then suffer a severe hangover. Right now we're 5-1/2 months into that hangover which will likely persist until 2024 or 2025. I expect QQQ to ultimately bottom somewhere around 70, of course with numerous strong bounces along the way including one which is probably happening right now.

I have continued to progressively shift my equity short:long ratio toward the long side and have now become 5:4 short to long versus 2:1 in my previous update.

Especially during the past week we have experienced historic bargains for many individual shares and sectors including GDXJ, GDX, ASA, XBI, INTC, TKC, TLT, and VMBS, thereby encouraging me to add to all of the aforementioned. There is also an above-average likelihood of a quarter-end bounce which could persist into July; 9 of the past 10 quarters have behaved in that manner regardless of whether or not we were in a bear market, plus we are finally seeing some short-term bullish signals. Most likely QQQ will climb to perhaps 310 before continuing its downtrend to its 2022 intermediate-term bottom somewhere around 210. Most investors expect neither a strong rebound nor a continued severe downtrend, thereby making both much more likely than usual.

For those who have not read my numerous previous postings, this does not mean that I have closed out my large short positions in QQQ and related shares. Instead I have added aggressively to the long side in my favorite undervalued holdings with low price-earnings ratios, heavy insider buying, and intense outflows. I have no intention of closing out my shorts just because I think the chance of a short-term bounce are higher than usual. When VIX doubles from its current level it might be time to consider closing short positions. I had previously closed out all of my short positions and related short funds in March 2020, December 2018, and January 2016.

If VIX surges higher, but I don't believe that we are approaching a major intermediate-term bottom for QQQ, then I will likely sell covered out-of-the money puts against some of my short positions.

Gold mining and silver mining shares are especially compelling, not only because they have been trading at their lowest levels in more than two years but because they have consistently and dramatically outperformed during three previous bear markets for large-cap U.S. growth shares.

We had important peaks or lower highs for large-cap U.S. growth shares on January 4, 2022. Previous similar tops include March 2000, January 1973, and September 1929. In all of the above cases, large-cap U.S. growth shares ended up losing more than 80% from their respective zeniths, while gold mining shares after an initial delay ended up gaining hundreds of percent.

Let's look back at 2000-2003 since it is easiest to find free chart data compared with the 1970s or 1930s. HUI ($HUI on stockcharts.com) bottomed at 35.31 on November 15 and 16, 2000 and climbed to 258.60 by December 2, 2003. This is a total percentage gain of (258.60 - 35.31) / 35.31 or 632.37%. Perhaps we won't repeat that exact percentage surge but, especially as we had similar impressive rallies for gold/silver mining shares during the 1930s and 1970s, an outsized gain is more likely than not over the next several years. I prefer GDXJ to other funds in this sector since its mid-cap focus tends to outperform large-cap shares like GDX especially when fund managers no longer fear repeated net outflows and are confident enough to diversify into holdings other than the biggest and most liquid names.

Here are two useful charts.

We are at the point in a typical bear market where a rebound has become much more likely than usual. If this rebound becomes sufficiently extended so that VIX moves back below 20 then this will be my signal to add to my short positions, as has been the case during the past several months especially in late March when VIX dropped below 19. In general this is a useful guideline during all true bear markets including 2000-2003 and 2007-2009:

At the beginning of 2021 almost everyone in the media and elsewhere had been bearish toward the U.S. dollar. This has been replaced by a nearly opposite consensus about a powerful greenback:

Recently I have been buying shares of FXY (Japanese yen), FXF (Swiss franc), and FXB (British pound). This leads to the next topic which is how safe havens are currently incredibly unpopular.

Investors have been making net ouflows from safe havens of all kinds including U.S. Treasuries like TLT, the above-mentioned currencies, emerging-market government bond funds including TEI, LEMB, PCY, and ELD, as well as other government-guaranteed funds like VMBS.

Investors have become so accustomed to the failed Boglehead approach that they've actually been net sellers of gold/silver mining shares, government bonds of all countries including the United States, safe-haven currencies, and related assets like U.S. government-guaranteed mortgage-backed securities (VMBS). Most of this money has gone into buying still-very-overvalued large-cap growth shares and funds. This has created compelling opportunities for safe-haven sectors which in many cases have been trading near multi-year lows. Long-dated U.S. Treasuries haven't sported such high yields in more than eight years, including TLT which traded at 107.78 at 7:47 a.m. in the pre-market session on June 16, 2022. This marked the lowest point for TLT since April 3, 2014.

TEI is a compelling fund of emerging-market government bonds with a discount that is 50% above its long-term average.

TEI recently traded with a discount of more than 13% versus its long-term average near 8%. Emerging-market government bonds aren't well known to most investors and are usually ignored regardless of their valuations. This fund has been actively managed by the same lead advisor since 2006 and is well-diversified internationally.

Some aggressive underpriced assets have become worthwhile for purchase.

Companies including INTC, TKC, and GEO have recently been trading at unusually low price-earnings ratios relative to their profit growth. Some entire exchange-traded funds including XBI have also been periodically underpriced, with XBI also experiencing very heavy insider buying of many of its components including notable CEO purchases. KWEB had experienced a deep undervaluation earlier in 2022 but has now rebounded sufficiently so that I will continue to hold it but I will not add to my position unless it retreats to an important higher low later in the year.

Considering that we are in a severe bear market, VIX has been peculiarly low so far in 2022.

VIX has remained irrationally depressed throughout 2022, indicating that much greater losses lie ahead even if--or especially if--we have powerful upward bounces along the way which cause VIX to drop below 20. I am baffled by the failure of VIX so far in 2022 to reach 40, not to mention a much higher level like 60 or 70.

If you and I both had perfect advance knowledge at the beginning of 2022 regarding what QQQ and SPY would do during the first half of 2022 then I would have bet you a lot of money that I could forecast the behavior of VIX. And I would have been dead wrong. I have been puzzled that 1) VIX hasn't touched 40 so far in 2022; and 2) VIX has retreated below 20 several times in recent months. Both of these phenomena indicate that even professional investors are mostly unafraid or oblivious to the possibility of a significantly extended downtrend in 2022. It's not going to be different from every other bear market in history: eventually VIX will rally to double or more its current level and when that occurs it may become timely to finally close out some or all of our short positions.

Too many investors are comparing current valuations with their all-time peaks of 2021-2022 and drawing faulty conclusions.

I have met dozens of people who tell me something like this, "Look how much QQQ has dropped from its top. If it's down 30% then it has to be a great bargain." This is like announcing while you're descending from the peak of Mount Everest: "I've come down seven thousand feet so far, so I have to be very close to the bottom." If we look back at the highest-ever peaks for U.S. equities in their entire history then the beginning of 2022 is by far the all-time record, followed by March 2000, September 1929, and January 1973. (You could also count the railroad bubble of 1873 and the canal bubble of 1837 but let's skip those for now.) As of today's closing prices, large-cap growth shares overall were almost exactly matching their January 1973 tops and weren't far below their September 1929 zeniths which many people in the Great Depression believed would never be exceeded. In other words, what looks at first glance like a great discount compared with the top is still enormously above fair value and historic averages. If QQQ were to drop 75% more then it would be at the average level of a bear-market bottom at roughly 40% below fair value.

The bottom line: as the current bear market progresses in typical fashion with periodic sharp surges higher, there are opportunities to make money on both the long and the short side. Be persistent, gradual, and disciplined at all times and continually rebalance your portfolio to adjust to these fluctuations.

Disclosure of current holdings:

Here is my asset allocation in order from largest to smallest position: cash including I Bonds paying 9.62% guaranteed (available to anyone with a U.S. social security number); TIAA Traditional Annuity paying an average of about 3% (for legacy retirement accounts); long TLT (some new); short XLK; short QQQ; long GDXJ (many new); long GEO (some new); short TSLA; long GDX (many new); long KWEB; long EWZ; long ASA (many new); long INTC (many new); long TKC (many new); long XBI (some new); long TEI (all new); long EPOL (some new); long LEMB (all new); long TUR; short AAPL; long T; long ECH; short XLU; short XLE; long PCY (all new); long VZ; short IWF; short SMH; long WBD; long VMBS (all new); long FXF (all new); long FXY (all new); long FXB (all new); long UGP; long ITUB; long BBD; long TIMB.

“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.

“When your views are truly contrarian they are inevitably uncomfortable. Courage and the ability to withstand pain are required.” --Michael Steinhardt

STEADILY SELECT SPLATTERED SECURITIES (March 29, 2020): A useful analogy to a bear market is to imagine that several dozen people carry buckets of brightly-colored paint up to various floors of a skyscraper and then simultaneously pour their buckets onto the street. The buckets which were carried to the highest floors will generally splatter more aggressively than buckets from lower floors but it will be a messy correlation rather than a clean linear pattern. In other words, some of the paint from floors which are not at the very top will end up splattering worse than some of the paint from higher floors due to the unpredictability of nature. The same is true of bear markets: the most overpriced assets will generally suffer but some undervalued assets and others which "shouldn't have" dropped so much will do so anyway. Because most investors aren't accustomed to trading in bear markets, especially now when we haven't experienced such a downtrend for eleven years, most people will be acting from confusion rather than with advanced planning. Even an inferior method is better to acting randomly or using emotions.

The weekly timing of the selling signals that the least-experienced investors are doing the most selling--which is when you should be doing your heaviest buying.

When do ordinary inexperienced investors sell? Definitely not at 11 a.m. on a Wednesday since they're busy working at that time. Most inexperienced people place market sell orders on non-trading days when they have time to do so. We saw this clearly in December 2018 when during the weekend prior to December 24 many investors sold in a panic with their orders being filled at the open that day, which triggered sell stops that led to additional losses. Investors had all of Christmas Day to place more market sell orders which were filled near the open on Wednesday, December 26, 2018 which triggered a final round of stop-loss selling followed by one of the biggest one-day rebounds in history the same day.

Do the opposite of the weekend warriors and follow the Nikkei 225 futures especially on Sunday evenings.

Nearly identical behavior has been occurring in recent weeks when ordinary investors have placed market sell orders during most March weekends which are filled at the open on Monday followed by stop-loss orders being triggered by those lower prices. The market then mostly recovers later in the week, only to experience the same behavior the following weekend. If you look back at the first quarter of 2009 then we had another instance of the same phenomenon. This kind of action has been true for decades. Experienced traders will do extra buying near the opening bell each Monday and on other days following non-trading days (like December 26, 2018) whenever fear is elevated.

Sometimes U.S. futures are trading limit down which makes it impossible to track how the global markets are behaving. Ignore the U.S. futures especially on limit down days and watch the Nikkei 225 futures which don't have limit-down restrictions. On Sunday evening, March 22, 2020, Nikkei 225 futures opened down about 11% and were down only 3% a few hours later, indicating that U.S. stocks would probably open lower but that better times probably were ahead. As I am writing this on Sunday evening we have similar albeit less exaggerated moves as Nikkei futures opened moderately lower and are now slightly positive. The exchanges' suspending trading during volatile moves is idiotic since most investors get especially nervous during trading halts. Some of my lowest purchase prices were achieved from fills which occurred within a few minutes of trading being resumed after an artificial halt.

When many investors and chartists are selling while top executives have been doing their heaviest buying since the last bear-market bottom in March 2009 then you know you should be gradually buying into weakness. Never chase after any recent trend.

Many ordinary investors have been confused by the market's recent plunge and have been either not buying into weakness or actually selling. Technical traders have been hit even harder by repeatedly chasing after short-term trends which usually reverse just after they are "confirmed." Do as the insiders do and gradually purchase whatever is most undervalued using ladders of good-until-canceled orders. Some of the best bargains have existed only for minutes or even for seconds on some especially-volatile trading days, so if you are trying to buy using market orders you are unlikely to succeed in getting the most-favorable prices. The ideal approach is one I use even in calmer markets: place ladders of very small orders of equal-dollar amounts which are spaced equally apart and which go very deep so the market never goes below the lowest rung in your ladder. It is better to buy very tiny amounts at truly compelling prices then to try to magically guess where you will profit from lump-sum trading.

When unusually heavy insider buying is combined with all-time record selling by inexperienced investors then that serves as an even stronger buy signal.

The best time to sell is when we have heavy insider selling combined with intense buying by the least-experienced investors; this is why I was steadily selling near the end of 2019 and the beginning of 2020. Now we have an even stronger buy signal due to all-time record selling by the least-experienced participants in the financial markets:

Funds and ETFs Witness Record-Breaking Outflows During the Week

A surprising number of stocks and bonds recently traded at or near multi-decade lows.

Bear markets are notorious for their capriciousness and usually end up erasing a significant percentage of the gains which had been achieved in recent bull markets. When U.S. equity indices had bottomed in early March 2009 they didn't just give up their gains since 2007 or 2006 but fell to 12-1/2-year lows for the S&P 500 which meant their cheapest prices since 1996 without adjusting for inflation. If you adjust for inflation then stocks in early 2009 had returned all the way back to their levels from the mid-1980s. Recently many traded shares fell to prices not seen since the early years of the 21st century or in some cases in a few decades without even adjusting for inflation. This has created compelling buying opportunities for those who have been alert to recent bargains while highlighting that the Boglehead approach of buying no matter how overvalued the stock market is doesn't work in the long run.

Those who bought U.S. stocks in August 1929 lost half of their money in inflation-adjusted terms if they held them for 53 years until August 1982.

There is zero political resistance to endless stimulus and literally printing money as rapidly as possible.

It is almost impossible for those who believe in restraining deficit growth to be seriously considered nowadays since the popular mood is for governments around the world to "do something about" the economic contraction caused partly by the severe restrictions required to fight the spread of coronavirus. The U.S. just passed a two-trillion-dollar stimulus package, the U.S. Fed is taking extraordinary action in other aspects, while governments worldwide are acting similarly even where they have a long history of being more subdued and conservative. This will have profoundly inflationary implications which aren't generally being considered by many investors except for insiders. Top corporate executives have been doing their heaviest buying in many companies which will benefit from rising inflationary expectations and massive global stimulus.

Housing prices have been collapsing but almost no one knows about it unless they are in the industry.

It is pretty clear why homebuilders and those who wish to sell real estate aren't eager to have it widely known that the much-publicized collapse for financial assets around the world has been accompanied by equally dramatic but mostly hidden losses for both residential and commercial real estate. REITs have plummeted but so many sectors have done likewise that this is often overlooked. Due to the coronavirus there aren't the usual selling procedures like open houses (scheduled public viewings) or even the ordinary procession of buyers meeting sellers. Most people naively believe that housing prices are remaining relatively flat. As wealth has evaporated worldwide this must inevitably lead to significantly lower prices for real estate, and since downturns for real estate usually last for a few years or more the pullback will likely continue for at least three years. If you are able to sell then do so as soon as possible, while if you have been considering doing any buying then I would strongly recommend waiting at least until 2023 before taking action.

The timing of lower highs will be of major significance in the U.S. elections scheduled for November 3, 2020.

Nearly all bear markets are notable in the way in which they form lower highs. The Russell 2000, consisting of companies 1001 through 3000 by market capitalization out of all 3600 U.S.-listed companies, topped out on August 31, 2018, formed a key lower high on January 17, 2020, and recently plummeted so deeply that it was recently trading below its levels from the final months of 2013. This wasn't widely reported in the mainstream financial media but it is immediately obvious on a long-term chart. We have likely begun a powerful rebound for risk assets around the world which will have major implications for the U.S. Presidential, Senate, and House of Representatives elections scheduled in just over seven months. If the S&P 500 and similar U.S. equity indices are completing important lower highs with the S&P 500 near three thousand around Election Day then Donald J. Trump has a good chance of being re-elected while the Senate will likely remain with Republicans holding a majority. On the other hand, if the current rebound stalls around some other time like Labor Day (September 7, 2020) and thereafter falls sharply then we could experience a meaningful shift toward the Democrats. During the 2007-2009 bear market there was a major plunge which began near the opening bell on the day after Labor Day which made it far easier for Democrats to sweep that year; during the 2000-2002 bear market there was an important top also around Labor Day of 2000 followed by a moderate pullback which may have made it possible for George W. Bush to squeak by in a disputed contest.

The media often discuss how the results of the U.S. elections will impact the markets but it is probably even more significant to consider how the markets will impact the elections. If Democrats regain both the U.S. Presidency and the Senate, and retain control of the House of Representatives, then significant tax and other legislative changes will become nearly certain for 2021 which could persist for several years or more.

Insiders have been buying at their most aggressive pace since March 2009.

The ratio of insider buying to insider selling reached its highest ratios since February-March 2009 with the following article discussing this topic:

Executives Are Buying Stock in Droves

Top corporate executives aren't permitted to sell the shares they purchase until at least six months after the date of purchase or else they have to surrender their gains. This means that they have not been buying simply in anticipation of a brief sharp recovery but are looking for a more sustained rebound.

Insider buying has not been uniform across sectors. Especially-undervalued securities in energy and travel are among those which have experienced multi-decade peaks of insider accumulation during the past few weeks.

TLT has been forming lower highs since the pre-market session on March 9, 2020, while VIX revisited the mid-80s multiple times two weeks ago and completed a significantly lower high when most major U.S. equity indices slid near the opening bell on March 23, 2020.

TLT, a fund of long-dated U.S. Treasuries, topped out at 181.41 three weeks ago on March 9, 2020. You won't find this number on your charts unless you use data which includes trading outside of regular hours since this top had occurred in the pre-market session at 7:56:29 a.m. Eastern Time. Meanwhile, VIX peaked several trading days prior to the March 23, 2020 bottom for the S&P 500, the Nasdaq, and many large-cap U.S. equity indices. This implies that the most-experienced investors who tend to purchase long-dated U.S. Treasuries and portfolio insurance became less eager to hedge at the same time that most ordinary investors were becoming increasingly nervous about their portfolios. This is analogous to the market's behavior in early 2009 prior to one of its strongest-ever ten-month uptrends from early March 2009 through early January 2010.

Summary: buying now will likely be profitable especially because we remain in a bear market for U.S. equities which began when the Russell 2000 topped out on August 31, 2018. Buying near the end of 2018 was highly profitable and buying in recent weeks will likely prove to be even more rewarding.

If you buy near an intermediate-term bottom during a bull market you will usually come out ahead. If you buy near an intermediate-term bottom during a bear market, especially when insiders are buying at their most intense pace in eleven years and in some sectors at all-time record levels, you will achieve greater annualized gains since bear markets tend to be far more volatile than bull markets in both directions. Those who bought in the final months of 2018 were well rewarded especially if they sold in late 2019 and early 2020. Similarly, those who have been buying the least-popular securities in recent weeks into the coronavirus panic and who keep buying into pullbacks will likely enjoy even greater annualized gains during some unknown period of months.

The bottom line: with all-time record investor outflows you know it must be worthwhile to be doing the opposite.

The most-experienced investors are doing their heaviest buying in eleven years while the least-experienced investors are doing their most panicked selling in eleven years. You don't need an advanced degree to figure out which side will come out ahead, and since we are in a long-term bear market the upcoming gains will likely occur surprisingly quickly. Whenever most people you know become excited about "getting back into the market" and insiders are unloading then it will be time to get out again.

Disclosure of current holdings:

From my largest to my smallest position I currently am long GDXJ (some new), 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), XOM (all new), PEO (all new), EZA (all new), GXG (all new), FXF, GREK (all new), EWW (all new), GNK (all new), EGLE (all new), IPI (all new), SBLK (all new), SALT (all new), FLNG (all new), EGPT (some new), GOEX, BGEIX, NGE, FXB, XOP (all new), CCL (some new), BA (all new), AA (some new), IDX (some new), EWM, RGLD, WPM, SAND, SILJ, KLXE (all new), and CHK. I am completely sold out of U.S. Treasuries, HDGE, SEA, SLX, ASHR, ASHS, TUR, FM, ARGT, RSXJ, LIT, EWU, EWG, EWI, EWD, EWQ, EWK, EWN, WOOD, EPHE, JOF, and AFK.

I have closed out all of my short positions which I will generally do whenever VIX reaches a multi-year peak. The only securities I would sell short now would be long-dated U.S. Treasuries and their funds including TLT. I would sell short actual houses if there were a way to do so. My cash and cash equivalents including bank CDs and stable-value funds (fixed principal, variable interest) comprise 17.7% 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 longest-ever bull market which began for the S&P 500 on March 6, 2009 may have ended for that index on February 19, 2020. This historical evidence suggests that the current bear market for the S&P 500 could last for 30-36 months which implies a major bottom for U.S. equity indices somewhere near the end of 2022.

The heaviest insider buying since March 2009 combined with all-time record investor net selling and repeated pullbacks near the opening bell worldwide especially on Mondays is likely signaling a major uptrend for most global risk assets. Keep steadily buying the most undervalued stocks and bonds and don't sell again until VIX is back down to the mid-teens. Some commodity-related and emerging-market securities may have begun major uptrends with triple-digit percentage gains while some individual shares have already doubled from their recent deep nadirs.