“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.

“Buy on the sound of cannons; sell on the sound of trumpets.” --Nathan Rothschild, 1810

EUPHORIA TO PANIC TO EUPHORIA (June 9, 2020): Since the internet became popular in the 1990s we have experienced far more frequent and more exaggerated extremes in both directions for nearly all assets. During the past half year we have gone from U.S. equities being dangerously overpriced, to a fabulous buying opportunity for equities worldwide, back to an even more dangerous euphoria which exists today. Even hated energy and Brazilian shares have soared and have recently encouraged insider selling along with new massive fund inflows and all-time record call buying for numerous securities. It is as important to sell now as it had been at the most extreme stock-market peaks in history including August 1929, January 1973, March 2000, and October 2007. Actually 2007 wasn't even especially overvalued but I included it since the other dates may seem like ancient history especially to younger investors. It is urgent to sell soon while almost everyone else is congratulating themselves for being far too heavily invested.

As usual, VIX is sending a valuable signal which almost everyone is ignoring.

In mid-March 2020 VIX soared into the mid-80s and then began to form considerably lower highs. This signaled that the most experienced investors who often sell put options as portfolio insurance were getting less worried about the possibility of significant additional stock-market losses while most amateur investors were getting more worried as prices continued to drop into March 23, 2020. In March 2020 we had the biggest-ever weekly net outflow from equity funds in history, surpassing the previous record from February 2009, and then the record was broken the very next week near the end of March 2020. The most experienced investors were correct as we experienced one of the strongest short-term percentage rebounds in history. Now we have the opposite situation where amateurs are getting more optimistic while VIX is making higher lows instead of lower lows for several trading days, signaling that the most-experienced options traders are increasingly worried about a substantial selloff in upcoming weeks. I have no doubt that the professionals will be proven right yet again.

Investors have been piling into whatever has been rallying the most in percentage terms regardless of merit.

Even bankrupt companies have been enjoying astonishing price increases in recent trading days while sectors which had been abandoned as hopeless including Brazil and energy have enjoyed dramatic upward surges. Just as the strongest rallies are preceded by especially sharp extended losses, the most severe pullbacks are preceded by nearly vertical price increases. Investors have already seen major uptrends followed by sharp downtrends in September 2018 and March 2020, both of which had occurred after the Russell 2000 had completed its all-time top on August 31, 2018. The bear market for the Russell 2000 has existed for nearly two years and will soon intensify regardless of what happens with coronavirus, geopolitics, or any other meaningless triggers or phony cause-and-effect relationships. Whenever assets are dangerously overpriced they are far more vulnerable to above-average percentage losses.

Mega-cap technology shares have never been more overpriced overall even if you compare them to periods like March 2000.

Stocks like AAPL and MSFT have never been more overvalued relative to their likely future profits than they are now. The same applies to a few dozen other overpriced names which are almost all involved directly or indirectly with technology and modern finance. As is often the case during a lengthy bear market, investors are very reluctant to give up on their blockhead Boglehead dreams about making money "in the long run." Those who buy near major tops have always come out far behind even if they are patient enough to hold forever; those who bought or held Nasdaq shares prior to their March 10, 2000 intraday peak of 5132.52 are currently barely ahead after adjusting for inflation after more than two decades and that is with the Nasdaq recently registering a new all-time top. Investors who owned stocks in August 1929 had lost more than half of their money after adjusting for inflation by August 1982 which was 53 years later, and that is counting all reinvested dividends.

Sometimes bulls make money and sometimes bears make money but hogs get slaughtered.

Bulls made plenty of money from Christmas 2018 through January-February 2020. Bears did beautifully during the final weeks of winter. Afterward bulls have done wonderfully. Those who are just sitting around doing nothing and congratulating themselves for being geniuses are about to lose more than half their money for the third time in the 21st century which has only existed for a little over twenty years. In a bull market you can be more patient while buying and holding, but in a bear market such an approach will wipe you out. Sometimes you absolutely must sell and now is absolutely one of those times.

Real estate will likely lose one-third of its value worldwide as it had done in 2006-2011.

One reason the previous recession was so severe was that as people perceived their houses being worth less they cut back on their spending and sold stocks. This is known as the negative wealth effect and it will likely be a major factor in 2020-2023. Only a few analysts are concerned about how lower prices for stocks, houses, bonds, and many other assets will encourage people to become more frugal.

Sometimes you have to adjust your expectations to adjust to reality.

When I was aggressively buying in March 2020, and in some cases through mid-May 2020, I expected to hold most of those shares for perhaps one year and at least into early 2021. However, they have experienced such outsized gains which in many cases exceeded my most optimistic one-year forecasts that it is essential to get out now while it is still possible to achieve high prices. The speculative fever and mood in June 2020 is at least as great as it had been in August 1929, January 1973, and March 2000, and far exceeds that of any time in 2007.

A false belief in the omnipotence of the Fed will be especially crushing when this illusion is shattered.

At every major market top in history there is an overconfidence that nothing bad can happen because of one reason or another. Today there is a widespread false belief that the U.S. Federal Reserve will print unlimited money or purchase unlimited quantities of securities and that this action will enable prices to keep climbing indefinitely. As the bear market continues and intensifies and investors progressively realize that this was a false premise then they will become even more disillusioned than they would have been if there had been no Fed intervention. This loss of faith will be a contributing factor to one of the biggest-ever percentage drops for U.S. equity indices in their entire history.

Summary: even if you live a long life, selling now will likely be one of the key wealth-building events of your lifetime. You must sell high and prepare to buy low again.

Far too many investors believe that they have already experienced the bear market of the decade when it has barely gotten underway. Absurdly overpopular mega-cap technology shares will likely drop by 70% or more over the next few years or less. Sell now when everyone wants to party on.

The bottom line: investors are more dangerously overconfident now than they were in early 2020.

While insiders are doing some of their most intense selling ever recorded for many sectors, we have set new all-time records for call buying relative to put buying along with numerous all-time extremes in short-term percentage gains for thousands of securities along with other rare extremes of positive sentiment. We have gone from euphoria in early 2020 to panic in March 2020 to euphoria in June 2020. The next stop is despondency as the market probably surrenders over half of its post-March 23, 2020 gains for many assets.

Disclosure of current holdings:

From my largest to my smallest position I currently am long GDXJ, the TIAA-CREF Traditional Annuity Fund, SIL, bank CDs, money-market funds, GDX, I-Bonds, GOEX, BGEIX, RGLD, WPM, SAND, and SILJ. I am completely sold out of Brazilian shares, energy shares, shipping, other emerging markets, and numerous other equity funds which I had been aggressively accumulating in March through mid-May 2020.

In March I had closed out all of my short positions; now I have closed nearly all of my long positions except for those related to precious metals while selling short especially XLK along with modest short positions in TSLA and ZM. These short positions combined total 8.8% of my total liquid net worth and I plan to keep adding to them into strength. Downside risk for U.S. equity indices is probably greater now than it has been at any time since early 2000. I would also 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 61.1% of my total liquid net worth, my highest percentage total since January 2018 when I had previously been a heavy seller.

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

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

Investors have amazingly become more aggressive buyers of stocks, junk bonds, and call options in June 2020 than they were in January-February 2020 which had set most of the previous all-time records. The thundering herd is always maximally optimistic near a critical top, just as they had been maximally pessimistic less than three months ago. Look out below.