The Endless Bear Market?

Bob Prechter was on Yahoo Tech Ticker on Thursday warning that "We Are On Schedule for a Very, Very Long Bear Market":

The global selloff in stocks accelerated Thursday, sending the Dow down 3.6% to 10,068 while the S&P 500 lost 3.9% to 1,071.59 and the Nasdaq shed 4.1% to 2,204.

All major U.S. averages are now down for the year and at least 10% below their 2010 highs, meaning the downturn has officially entered "correction" territory.

Unfortunately (for bulls), there's much more selling ahead, according to Robert Prechter, president of Elliott Wave International and author of Conquer the Crash.

"We should be in for [another] week or two of pretty serious selling," Prechter says. "They'll be bounces along the way...but I think this should last a long time. We should be on schedule for a very, very long bear market period."

In the near-term, the veteran market watcher predicts a "dramatic increase in volatility," beyond what's already occurred. The CBOE Volatility Index (VIX) rose another 30% today and is now up about 180% from its late April lows.

Notably, today's selling occurred despite a rally in the euro amid reports of central bank intervention. Joe Brusuelas of Brusuelas Analytics says, "The capitulation in today's market has more to do with the unwinding of the easy money [carry] trade on commodities," which fell again today, with notable weakness in energy and palladium.

Meanwhile, Treasury prices continued to benefit from the "risk aversion" trade with the yield on the benchmark 10-year note falling to 3.21%.

Broken Record or Market Sage?

Other than to say "a long way down," Prechter wouldn't say how much further he thinks the market will fall, suggesting a repeat of the 1930-32 scenario when "extremely sharp rallies" kept investors interested and "feeling like a bottom [was] forming."

Anyone familiar with Prechter knows he's been predicting doom for a long time so it's tempting to dismiss his latest warning -- a veritable repeat of what he said here in February. But he's not a perma-bear and did turn bullish ahead of the bottom in March 2009.

More dramatically, in 1978 he co-authored Elliott Wave Principle - Key To Market Behavior, which predicted a great bull market similar to the 1942-1966 rally. By his own admission, Prechter underestimated the extent of that historic rally, which ran from 1982-2000 and saw the Dow rise 1,500% from 777 to 11,723.

Prechter says the market has spent the past 10 years building a "major head and shoulders" top from those 2000 highs, even though they were exceeded in 2007. Ultimately, he expects a "corrective mode that's going to retrace virtually the entire" 1982-2000 bull market.

"The best place for most people to be is in cash" and equivalents, he says. "You want maximum liquidity until this thing blows over."

Editor's note: We did NOT interview Prechter because the market was tumbling; today's appearance was scheduled earlier this week. Sometimes it's better to be lucky than good...

I had lunch with a fixed income manager and we talked markets. "The market wants more quantitative easing," he said. I told him "sure but Trichet said the ECB does not engage in quantitative easing". We both chuckled.

I told him in a zero interest policy world (ZIRP), the only way to stimulate your economy is through your exchange rate. "That's why quantitative easing is bearish for the euro". He agreed with me that the euro is heading towards parity.

On specific "conviction trades", he told me he's short Canadian Real Return Bonds, feeling that inflation expectations will wane and real rates will rise once the Bank of Canada raises interests rates in June or July. "Fundamentals are strong in Canada and inflation is not an issue".

Interestingly, the WSJ carried an article on Brian Weinstein, who manages $3.1 billion BlackRock Inflation Protected Bond, the company's flagship TIPS fund, stating that he is short TIPS. Mr. Weinstein said "investors are mistaking inflation volatility for inflation -- inflation volatility means we have both inflation and deflation risk."

Right now, everyone is worried about a protracted deflationary wave. There are those who fear a major crash is coming in stocks. The fixed income manager I met today told me "it's all hedge funds right now". I agreed telling him "the extreme volatility is driven by the top hedge funds who are loading up again, preparing for the next move up".

Where do I see the best value going forward? The euro's demise has hammered the solar sector, so I used this as an opportunity to load up more shares. You can listen to Bob Prechter and wait for the "ultimate bottom", but my hunch is that the big hedgies are having fun toying with retail and weak institutional clients. I've had enough of doom & gloom, and I'm looking forward to the solar boom. It might not happen next week, but my bet is that solar will be the next big bubble, so I stay cool and use these sharp selloffs as a buying opportunity. Bring it on big hedgies!!!