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Bear Model and US Equities by SImit Patel

As a permabear, my natural inclination is to be bearish on US equities. However, even hardcore permabears like myself are forced to acknowledge an uptrend, and clearly an uptrend exists on the S&P. Below is a weekly chart of SPY, an ETF that tracks the S&P 500. Since March of 2009, we've been in a clear uptrend.

However, let's look at some arguments why it may not last:

1. You will hear many arguments about recovery will be W-shaped, U-shaped, V-shaped, etc. Personally, I agree with fellow permabear Eric Janzsen, who noted that we need to look to the Cyrillic alphabet to find a letter whose shape corresponds to the current economic cycle in the US. Janzsen argues for a Cheh-shaped progression Janzsen argues for a Cheh-shaped progression. Basically, that while we may have some seemingly strong bull trends, as we did during the Great Depression, the ultimate trend is still bearish.

2. Stefan Karlsson notes that stocks are still overvalued from a fundamental perspective, noting that earnings of broad baskets of stocks are down 30% while prices are down just 20%.

3. Strict adherents to Austrian economics will note that a recovery cannot really happen so long as malinvestments are not liquidated. Bailouts prevent the liquidation of malinvestments and the return of asset prices to appropriate levels; so long as this situation maintains, a recovery seems unlikely. I agree with this notion from a philosophical perspective, although from a financial perspective, it does not seem to be particularly meaningful. We can have a rally in the stock market and a plagued economy; the two are not mutually exclusive.

Personally I focus on trading the US dollar, though my bias is to short the S&P as it approaches strong resistance levels.

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Simit Patel

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