If you have been reading my reports, listening to my radio show or watching me on Fox News and Fox Business, you would know that in the April/ May period, I started to turn bearish on the market. This did not come out of thin air. My stance on the markets comes from exhaustive studies of the markets. It is in these studies of the characteristics of both bull and bear, that I believe, keeps me in lockstep or one step ahead. It is not perfect, but it is darn good. You see, the fear and greed seen today is the same as it was 50 years ago, except that things are much faster. But the same characteristics of tops and bottoms today pretty much look just like it did back then. Thus, my thesis is that the past 5 or so months was nothing more than a classic topping out process after a 2 year bull market, which has now turned into a classic bear market…and this report, has been in front of it all the way down. In fact, just about everything that occurs in a topping process showed up making this bear somewhat easy to read.

So save the following. Why? Because after the next bull market is over, you will want to be able to recognize these same topping characteristics when they show up again.


For starters, I told you way back in the April/May period that this might not be a correction like last year. Why? Because the first thing you need to know is that bull markets have a shelf life. They do not last forever. When markets went into corrective mode in 2010, the bull was only a little over 1 year in duration. Bull markets usually last between two and two and a half years….thus this year’s top had to be watched more closely as 26 months is just about right to end a bull.


I follow sentiment all the time but it only matters to me when it goes to extremes. Overly bullish sentiment was lining up just like it always does near tops. These contrary indicators work well at extremes…and as I reported to you early in the year, a laundry list of bullish sentiment showed up.

I reported to you outlandish bullish calls. These calls never happen at the bottom…but nearer to tops. Without mentioning names, two popular market pundits called for a 2600 S & P and 20,000 Dow respectively in less than 18 months. We are talking 50-100% predictions in 18 months. Please recall the books “DOW 36,000” and “THE ROARING 2000s” that came out at the worst time.

I reported to you a slew of stock splits. No trick here. Very simply, companies split their stocks after big moves. When many companies do the same, there has been a direct correlation that it is getting late in the game. Just another characteristic that shows up nearer to tops. I reported to you that a good number of secondaries and ipos were coming to the market. Firstly, this just adds supply to the market but most importantly, this is another characteristic that shows up nearer to tops as companies and investment banks take advantage of market conditions after a run in the market. They cannot get this done during bear markets.

I reported to you that cash in the coffers of the big boys was at multi-years low…in other words, running out of ammo. Mutual fund cash dropped to 3.8%, a multi-year low.

Ipos were becoming less and less stellar and more and more overpriced. This always occurs nearer to tops as greedy investments banks try to take advantage of market conditions. The only victim is the public as you can now scan the performance of some of this year’s ipos. Not a pretty sight.

Lastly, under the category of sentiment are the insiders as insiders of corporate America were selling stock in numbers I had not seen in ages.

Foreign Markets Topped First.

As I told you many months ago, it was a warning shot that Asian markets, emerging markets and many European markets topped out in advance of ours. This has always had a direct correlation with the start of bear markets. This was a real eye opener for me. It was a real negative when I saw the German Dax and the London FTSE roll over as they have a great record of leading the U.S.


I reported to you that the financials were starting to act like it was 07-08 all over again. Markets go up…financials sit. Markets go down…financials lead down. Since I started writing about this, names like BAC are down over 50%. I am not saying anyone is going out of business like they did in 08. I am saying some are acting like it.


As sentiment was lining up…as financials started to act poorly…deteriorating market internals started to show up. I reported to you that semiconductors looked to have topped. This was way before major averages topped. This was on heck of a 1-2 punch as I have always put a ton of weight on the action of financials and semiconductors as a harbinger of things to come. In other words, two important areas that lead both up and down…were now heading down.


I reported to you that every time, major indices rallied back to new highs, fewer and fewer stocks were moving into new highs…meaning the market was being led by fewer and fewer names…another warning shot! More on this in a bit.


This led into the trifecta of woe as I reported to you that the whole commodity complex looked to have topped. Oils, Metals/Mining, Aluminum, Copper…you name it…started to get hit and hit hard.

So…we now had overly bullish sentiment, foreign markets topped out, financials, semiconductors, and commodities topped out…but most major averages were holding up. Why? Simple! As I reported to you, money was flowing out of “risk” areas and parking itself into the most liquid, lowest beta megacaps that have a major influence on the market. So while “underneath” the surface, things were heading south, major indices were masking the damage…another classic sign of an impending bear. All that was needed was moving averages to break for the major indices.


As I reported to you, nothing bad happens to the major indices until and unless they break below the 50 day moving average…and more importantly, the 200 day moving average. Throughout market history, these 2 areas are the place where the big money crowd stand up and defend the downside vigorously. Breaking the 50 day is not the death knell. The 200 day is. But first, the 50 day. On June 20, the 50 day was breached for most major indices. I reported this to you, but for me, unless you break the 200 day, you are just in corrective mode. So upon the first break, major indices ran right down to the 200 day. I wrote to you that if the market was going to hold, this would be the place. The good news was that in mid-June, the all-important 200 day held…leading to a rally. But as I reported to you, the rally was less than meets the eye as fewer and fewer stocks were participating in any upside…another sign of trouble ahead.

The market rally lasted a whopping 8 trading days before distribution showed up. On August 1, the 50 day was again taken out…and the 200 day tested again. I then wrote to you that if the 200 day was taken out, expect some serious selling as the big boys would recognize the market was finally giving up. You don’t need me to tell you what happened next as the market went into waterfall mode. It was one of the most vicious, quick and ugly drops I have seen in a long time. What led the way down? Correctomundo…the financials! The combination of too much bullishness, not enough cash in the coffers and the technical break was too much.

It was at this point that I reported to you that markets were about as stretched and extended away from the norm as they come. Knowing the markets eventually return to the norm, I pointed out to you to expect whippy rallies and drops until prices met the declining moving averages again. For a good 7 weeks, markets were as about as volatile as they come. We all watched in amazement as the Dow moved 500-600 points in a matter of hours. Combined with gaps and reversals on a daily basis, the market became all but unplayable. I took a step back and just made a series of short-term calls, some good…some not so good…as trying to call the short term in an environment like we saw is almost impossible.


I reported to you during those 7 or so weeks, several growth leaders continued to buck the trend but one had to be careful as most of the market looked horrid, but also the areas that were leading were all defensive…which is not a good thing (dollar discount stores, auto parts retail, utilities, food, drugs, beverages, tobacco). It has never been good for the market when recession-resistant, defensive areas lead the market. This led to the past couple of weeks where I had to note that after such a horrible drop, strategists stayed bullish, Barons was running a series of bullish covers and an air of “the worst is over” pervaded the air.


I wish I had a dime for every time I mentioned the term “bearish wedge!” This is a pattern that was building in the market for over 7 weeks. In classic bearish fashion, the S & P hit the 50 day average and sold off hard…leading me to tell you on 9/20 that the next leg down started. You know what has happened since.


I also noted that we had yet to see a “coughing up” stage, which always happens in a bear market. This occurs when more and more realize this is not a garden-variety correction. This leads the people who haven’t already sold…to sell…leading to mutual fund redemptions…leading to more selling…leading to the vicious cycle getting into full swing. That led me to write to you “Good Bye Growth Leaders!… that the leading growth names that held up so well…would start to come in. Since, leading growth names have been crushed. Just check out the charts of names mentioned like Bidu and Priceline. Even the almighty Apple has finally started to break.

What Now?

I must tell you that bear markets usually have three legs down. Some are saying we have just started the 2nd leg…some say the 3rd. In any case, the market has not only traced out a bearish wedge but looks to have traced out a bear flag. Any break below recent lows will complete this ugliest of all patterns and lead to lower prices. Unfortunately, I think odds favor this occurs…meaning bye-bye to recent lows.

I think all the %$#@&*$ who run this country, are out of all ammo they never had in the first place.

There is nothing I liked about last week’s action…especially with the market now going after everything. I would just point out that this is going to remain a very tough environment for the bulls as they will become more disappointed as anything holding up gets taken down. Keep in mind, during bear markets; it is quite normal to have rallies lasting many weeks. We just had one 7 weeks in duration…so be on your guard. For me, there is not much to do except let this play out. I will never know how long a bear lasts or how far it goes. I just wait for the signs of a bottom before I get back into the market in a meaningful way. I do have to remind you another one of my big worries has been that the initial vicious drop off the top reminds me of bad bear markets and not something garden variety…so this bears watching. Only time will tell.

My continued worry is in the continued horrid action in financials, but I must add the action in the price of “stuff”, like Copper, Oil and others, scares the heck out of me. Their prices are talking and they are saying demand is heading south. This will indeed have a direct correlation with markets, as price is the great forecaster of things to come.

I can count on my hands the number of stocks in good shape and those stocks continue to be defensive. I have not been able to find much in the way of positive, except, sentiment has turned bearish but after the recent drop. Strategists are finally lowering their targets for the market as well as the economy. This is quite normal at this juncture and after a big drop. Just keep in mind, this is not a pinpoint indicator. Sentiment is a secondary indicator. I would continue to play defense, as the overall picture remains gross. Not withstanding bounces, this is no time to be aggressive as many are being run over.

Gold and Silver

I start with silver because it topped out many, many months ago. I reported to you that silver experienced a classic climactic run which always ends a bull move. These patterns always look like an Eiffel tower. as they go straight up and straight down as the maniacal crowd goes into a buying panic AFTER a big run. Silver never recovered and is now breaking down badly! You may look at other climactic runs in names like JVA which occurred in early July and LVS which occurred last November.

Gold has now displayed the same climactic action as Silver only Gold revisited the highs one more time. I believe based on this action, Gold is now toast for possibly the intermediate term…joining Silver. Both had become over-owned and over-loved and were due to correct…especially Gold.

I hope this little missive goes into one of your files as a must read of the characteristics of bear markets that have shown up time and time again. This way, from your own study, you will be ready next time. I will soon be announcing a webcast showing you all of this and will have a complete write up on the characteristics of bottoms.


Gary Kaltbaum owns Kaltbaum Capital Management, LLC (“KCM”), an investment adviser registered with the U.S. Securities and Exchange Commission. The opinions expressed herein are those of Mr. Kaltbaum and may not reflect those of KCM. The information offered in this publication is general information that does not take into account the individual circumstances, financial situation or individual needs of an investor. The information herein has been obtained from sources believed to be reliable, but we cannot assure its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results.

5 replies
  1. Avatar
    hua says:

    Thank you! I love this and I thank you for everything. You have been very helpful for my portfolio management in this trying times.

  2. Avatar
    Butch W. says:

    You have no idea how much we appreciate a voice of reason in a storm of confusion.. thanks again Gary for your commitment to education and honest evaluation..
    I have gone liquid as much as possible as I suppose most who listen to your daily show have, and for once I’m resisting the urge to jumping back in a market that is obviously headed in a negative direction despite the charlatans advice found on various television programs.
    ..and reading and re reading Bill O’Neil’s excellent book.
    Hopefully at some point the voting public will demand more than a window dressing approach and ubiquitous political pandering, but until the day I see concrete results I will remain skeptical..

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