What's the best way to tell if we are currently in a bear market? Here is a quick technical hack that I learned many years ago from a friend, who is one of the best hedge fund managers around. The hack is this: take a look at a chart of the S&P 500 ($SPX) that is expressed in quarterly bars (e.g. the first bar on this chart is Q1 1998 and the last bar is Q4 2011, which has yet to be completed).
If you get two higher quarterly closes in a row (i.e. this quarter closes at a price that is higher than the closing price for last quarter), then you can assume that you are in a cyclical bull market.
If you get two lower quarterly closes in a row, then you can assume that you are in a cyclical bear market.
This model has an enviable track record. Using it, you would have gone short on 9/30/2000, covered your short and gone long on 9/30/2003, exited your long and gone short on 3/31/2008, covered your short and gone long on 9/30/2009. And. . .
You would have exited your long and gone short on 9/30/2011. The model suggests that we have now entered a new cyclical bear market, as indicated by the two lower quarterly closes in a row of Q2 2011 and Q3 2011.
Ignore this indicator at your own risk. Now is the time to be increasing your short exposure, if not at least significantly lightening up on your longs.
Viewed against the backdrop of this model, the sharp rally of the last few weeks must be seen as an expression of the volatility that is characteristic of bear markets.
Last, our "HFTA Recession Model," which is a proprietary composite of economic and financial leading indicators, currently puts the probability of a new recession at about 90%. In this we are in agreement with ECRI co-founder Laskshman Achuthan's view that things are about to get a lot worse.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.