Down 50 Percent In 500 Days - Is The Bear Market Over?

• By Simon Maierhofer
• On 11:51 am EDT, Tuesday March 10, 2009

SAN DIEGO (ETFguide.com) - The road to Hana is often considered the most beautiful road on the planet. This 68-mile long, winding piece of highway is located on the eastern shore of Maui.

Well prepared travelers know that it takes a good three hours to pass over the 59 bridges and 620 curves - while being entertained by amazing ocean vistas, waterfalls and bamboo forests - before reaching the end of the road.

Travelers who come unprepared or with a lack of intestinal fortitude on the other hand wish they'd never embarked on this trip.

The recent 50% plunge in the Dow Jones (AMEX: DIA - News), S&P 500 (AMEX: SPY - News) and Nasdaq (Nasdaq: QQQQ - News) proved more painful for many investors than trying to 'wing' the road to Hana.

Hawaiian State Highway 36, the official name of the road to Hana, dead-ends at the village of Hana. At this point, you have to decide how to tackle the equally beautiful (or painful) ride back.

After 18 months of relentless selling, investors have nearly arrived at 'Hana', a. k. a. a market bottom. Will you apply the lessons learned on the journey home?

What lessons did we learn?

Even though willing, the government is incapable of revitalizing our shattered economy. The economy was an ailing patient when the first bailout was just discussed in September 2008. Despite numerous government 'treatments', the patient had to be moved to the ICU.

In a special bailout report (available to subscribers of the ETF Profit Strategy Newsletter), published on October 2nd, 2008 (the day the $700 billion bailout was approved), we highlighted why the bailout would fail. As of today, both bailouts have failed miserably.

Financial ETFs such as the Financial Select Sector SPDRs (NYSEArca: XLF - News) and Vanguard Financial ETF (NYSEArca: VFH - News) lost nearly 70% of their value while the SPDR KB Bank ETF (NYSEArca: KBE - News) lost over 70%.

Not content with a simple index of financial companies, Bloomberg went a step further and created the TARP Index. This index, composed of 201 publicly traded companies that received funding through the Troubled Asset Relief Program (TARP), fell even harder and faster than any of the above. In short, the bailout did the opposite of what it was supposed to do.

When the U.S. sneezes, the world gets a cold. International ETFs like the iShares MSCI EAFE (NYSEArca: EFA - News) and Vanguard Total World ETF (NYSEArca: VT - News) have fared even worse than the U.S. benchmarks.

We have also learned that financial institutions and their CEOs can't be trusted. Unfortunately, there are many examples, one that struck me is a full page ad in the Wall Street Journal.

Here are excerpts from this last act of desperation: 'We stand with nearly 200 years of accumulated wisdom as a firm, with experience that spans bull markets, bear markets, expansions and recessions. We stand in over 100 countries with nearly 400 research analysts - by many measures the best and largest - research teams in the industry. We know that no matter what happens in today's market, or tomorrows, where we stand could not be more clear - we stand with you'.

This ad was taken out by Citigroup (NYSE: C - News) in December 2008. Who knows how many more tomorrows there will be for Citigroup. It would be funny if it wasn't so sad.

How about the financial media, can you trust CNBC and the likes? GQ finance columnist Joel Lovell puts it this way: 'My job is to give advice, and the best advice I can give right now is to be skeptical of people like me. My column is devoted to telling readers how to make money, but in these treacherous times, I've come to see that everything I'm saying could easily be wrong.'

Is he alone? Lovell continues: 'Should you jump in the market and buy low? I haven't the foggiest idea. Nor, I suspect, do such blustery broadcasters as CNBC's Jim Cramer and Suze Orman. Yet they continue to dispense wisdom with utter assuredness, despite having been so spectacularly wrong in the past.' How wrong?

On October 31st, 2007, Jim Cramer encouraged viewers: 'You should be buying things and accept that they're overvalued, but accept that they're going higher. I know this sounds irresponsible but that's how you make money.' At the time of Cramer's advice, the Dow was at 13,930.

On June 13th, 2008, Cramer claimed: 'Very simply, I believe it's time to buy, buy, buy'. The market has dropped another 47% since.

On March 13th, CNBC interviewed Sir Allen Stanford of Stanford Financial Group. CNBC's Carl Quintanilla innocently asked: 'You managed to avoid the sub-prime debacle almost entirely, didn't you?' As we've found out, Mr. Stanford (just like Bernie Madoff) avoided the sub-prime debacle through a simple Ponzi scheme. Either way, investors lost their money.

As if it wasn't bad enough, Carl Quintanilla had to ask one more question, 'How does it feel to be a billionaire?' How about that for giving one of the biggest white-color criminals one final chance to 'rub it in'?

Refreshingly different were the forecasts given via the ETF Profit Strategy Newsletter. Below are excerpts from some of the more recent issues. Judge for yourself of this advice would have been helpful to you.

September 15, 2008 (Dow: 10,917): 'Financials - a downward spiral with no stop loss provision. The perception that your money is safe keeps banks alive. Watch out if that perception changes'.

October 2, 2008 (Dow: 10,482): 'The bailout will fail!'

October 15, 2008 (Dow: 8,577): 'The Dow might see a trade-able bottom below 7,500 followed by a November/December rally.'

December 14, 2008 (Dow: 8,564): 'Range-bound trading, as we've seen over the past several weeks, grinds and tests the patience of investors. More importantly, it gives the stock market a chance to calm extreme levels of investors' pessimism. Conversely, optimistic sentiment, which should be more visible above Dow 9,000, gives way to further declines. These should draw the indexes close to or below their November 21st lows of 7,445 for the Dow and 740 for the S&P.'

February 13, 2009 (Dow: 7,850): 'The best target for a temporary low is 6,700 for the Dow and 700 for the S&P 500. Extreme pessimistic sentiment may drive the indexes even towards Dow 6,000 and S&P 600'.

Corresponding to the December 14th update we recommended to buy the following ETFs around Dow 9,000 (this window of opportunity opened between January 2nd and January 6th):

ProShares UltraShort S&P 500 (NYSEArca: SDS - News), ProShares UltraShort Russell 2000 (NYSEArca: TWM - News), ProShares UltraShort Financial (NYSEArca: SRS - News) and ProShares UltraShort Real Estate (NYSEArca: SKF - News). The above ETFs are up between 75% and 150% while the stock market lost some 25%.

On February 13th, we recommended to add the UltraShort MSCI EAFE ProShares (NYSEArca: EFU - News) and UltraShort MSCI Emerging Markets ProShares (NYSEArca: EEV - News) which are up between 20% and 35%.

Even though the major indexes have now shed more than 50% of their value, we don't believe a bottom has been reached just yet. It is time to start preparing for a change of trend though. As of Friday, the CBOE Put/Call Ratio clocked in at 0.87 with a 0.91 10-day average. The 10 day-average recorded at the November 21st, 2008 lows was 1.13.

The CBOE Put/Call ratio measures the fear displayed by investors via their option purchases. Extreme levels of fear often indicate a market bottom. As of today, investor's fear is not indicative of an imminent bottom. The market is on target to hit the levels outlined in our February 13th issue, Dow 6,000 and S&P 600.

Let's suppose the Dow hits 6,000 and starts to rally, then what? How can I maximize the gains from an upcoming rally while minimizing potential losses? Is Dow Jones 6,000 a true bottom or just another November '08-like decoy bottom?

Our most recent alert included specific strategies for conservative, moderate and aggressive investors. Strategies designed to maximize upside potential and minimize downside risk.

The March issue of the ETF Profit Strategy Newsletter also includes the target level for an 'ultimate market bottom'. This target level is based on an analysis of the four most reliable long-term indicators available: dividend yields, P/E ratio's, investor's sentiment and the Dow measured in the only real currency, gold (NYSEArca: GLD - News). Just like the above mentioned forecasts, this ultimate target level will help investors to protect their wealth and thrive.

Whether you've enjoyed the road to Hana or not, it's time to drive home. Will you get a chance to enjoy the beauty or will you be occupied counting the 59 bridges and 620 curves?

Buzz up!