7 Reasons to Expect a Bear Market in 2011 (SH, TZA, DXD, SDS, FAZ, SKF, DRV)

The financial media has for the most part finished their presentations of expert forecasts for the coming year. And as you’ve probably gathered, most of the strategists from the major Wall Street houses expect a continuation of the bull market that started in March 2009.

Other sentiment indicators show the same picture of exuberance and outright bullishness.

These include:

  • Individual investors as measured by the American Association of Individual Investors,
  • Advisors as measured by Investors Intelligence,
  • Mutual fund managers as measured by the average mutual fund cash quote, and
  • Speculators as measured by put/call ratios.

Financial market history teaches that so much agreement is unusual and dangerous. Whenever there is unanimity in relation to market forecasts it usually pays to become a contrarian, which is what I recommend now. But not just because of all this unanimity.

There are …

Seven Additional Reasons to Expect a Bear Market in 2011

First of all, the stock market is highly overvalued. It follows then that stock investments are nearly guaranteed to deliver poor, long-term returns.

Second, the rally since August 2010 isn’t based on sound and sustainable economic factors, but on unsound and fragile faith in the Fed’s ability to inflate asset prices.

Third, longer term interest rates have risen considerably since the Fed’s first announcement of QE2. In the past, bull markets were usually on borrowed time during a rising yield environment — even when fundamentals were much sounder than today.

History tells us we're in for a bear market this year.
History tells us we’re in for a bear market this year.

Fourth, stocks are extremely overbought when momentum indicators and the number of stocks reaching new 52-week highs stay below their cyclical highs, thereby not confirming the current run up.

Fifth, there is a debt crisis brewing, not just in Europe, but also in Japan and the U.S. The U.S. municipal bond market is already under pressure.

Sixth, the financial sector’s problems have not been solved, but only papered over with money printing and a suspension of mark-to-market (fair-value) disclosure.

Seventh, in China a huge bubble economy has developed. Since Beijing has already implemented a turn in monetary policy, this bubble is prone to pop in 2011, posing a major threat for a still very fragile global economy.

All of this makes for a very poor risk/reward relationship. Yes, the stock market could race higher — as it did in 1999 for example. But based on the excessive exuberance, plus the other seven reasons I’ve given you, I wouldn’t bet on that unlikely outcome.

And if you’d like to profit from market declines, you might consider an inverse exchange traded fund, such as ProShares Short S&P 500 (NYSE:SH).

ETF Daily News notes some other related bear ETFs:  Direxion Daily Small Cap Bear 3X Shares (NYSE:TZA), ProShares UltraShort Dow30 (NYSE:DXD), ProShares UltraShort S&P500 (NYSE:SDS), Direxion Daily Financial Bear 3X Shares (NYSE:FAZ),  ProShares UltraShort Financials (NYSE:SKF), Direxion Daily Real Estate Bear 3X Shrs (NYSE:DRV).

(NYSE:SH) seeks daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the S&P 500 Index. This means for every 1 percent decline in the S&P 500, the fund is designed to rise 1 percent.

Best wishes,

Written By Claus Vogt From Money And Markets

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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