I have no strong opinion on near term market direction. I was prepared for this little downward correction, as for the larger bounce off 666 on the S&P500, but am highly ambivalent about where we go from this juncture.

Has this been a four month flat correction?

A case can be made that the entirety of market action since November has been one giant zig-zag correction that terminated last week, in which case we are now about to plunge to 550 among the kind of panic conditions that were so lacking at the latest lows. In support of this scenario we have the death-defying performance of a great number of tech and consumer stocks that have failed to even re-approach their November lows, as well as some of the most extreme readings on retail bullishness since the start of the bear market (Rydex bull/bear fund assets, put/call ratio, NYSE Tick). Remember, the ’29-’32 market corrected from its initial crash with a 48% rally from November ’29 to April ’30. If this is the Greater Depression (and by the looks of the latest trade and manufacturing numbers, let alone the scale of the debt saturation that caused this situation, it is), perhaps a big zig-zag is all the enthusiasm society can muster this time.

Or was it actually a washout?

That said, more likely in my mind is a protracted rally extending to 900 or higher by summer, then rolling over to meet a date with 400 next winter. Look at last year’s rallies from March to May and July to August for an idea of what this might look like, though on a larger percentage and time scale because we are correcting a larger sell-off. The case for such a move is bolstered when you hear major investment banks’ strategists calling this a dead cat bounce. Too many people are still afraid to call a bottom, and they need to be suckered into long positions before this is over (along the same lines, too many traders are embracing the dead cat bounce and need to be shaken out before it can get back to leading the buy-and-holders to slaughter).

I am highly skeptical, though respectful, of calls for a the mother of all bear market rallies. Robert Prechter and some other Elliott Wavers, as well as Tim Knight (slopeofhope.com) seem to be anticipating a 6-month or longer rally to as high as 1050. I simply don’t see why that is necessary in this environment. This is a depression, and the last one was accompanied by bear market that, after the first 6 months, maintained the momentum of a cruising supertanker. Rallies of 20 percent and 2 months were about all you got from April 1930 to July 1932 as the Dow dropped from about 295 to 41. That deflation-driven event was a much more orderly bear market than the jagged trajectory of the dot-com crash, which occured while the credit bubble continued to expand. Interestingly, the 1966-1982 secular bear (a brutal 75% loss in real terms) also traced out such a series of steep plunges and rallies as the bubble kept inflating thanks to a compliant Fed and the abandonment of the last trace of the gold standard. Employment was down, but animal spirits were still running high with the computing boom, the advent of securitization, and new innovations in consumer credit.

Feel like a depression yet?

Though the current bear market is half over in terms of price (three weeks ago we hit -57% and you can’t lose more than 100%), we are still early in the game as far as the economy goes. Official (read: bullshit) unemployment is still just a tad over 8%, and while the old measure (U-6) is reading 14%, we are headed for 25% in a hurry. Baring a catalyzing event, Obama’s approval rating has nowhere to go but down — in terms of historical context his term is positioned like that of Hoover, not FDR, who took office after the market had bottomed and already doubled.

This all spells a continuing deterioration in mood, possibly even at an accelerated pace, but because the market is not efficient and couldn’t care less about the economic fundamentals, an aggressively bearish trading stance is still only warranted when the market is highly overbought in multiple time-frames. Right now, we are only mildly overbought on a week-by-week scale (on Friday we were very overbought on this scale), while of course oversold on a daily scale and still somewhat oversold to neutral on a monthly scale (picture a 1-year chart). It is the 3-10 year chart that makes me nervous about being too quick to load up on shorts again. All things being equal, does this look like a good spot to go short?

3-year view here from bigcharts.com:

To deal with this situation I have lately been slowly accumulating December 2011 OTM puts on the S&P, scaling up purchases as the market rises. These positions are for keeps. I do not intend to part with them until the market has fallen well below 600 if not 500 (32 months should be more than enough time for that to happen, no matter how things girate in the interim). For trading the twists and turns along the way, December 2010 and even 2009 puts do very nicely. They are highly liquid and responsive to the market’s daily moves.

I am still bearish on the precious metals from a trading standpoint, and exercise this opinion mainly through the silver futures market and various equity puts (that said, if you don’t already have a nice pile of physical gold, get some and you’ll sleep better). Here and there investors are still losing their minds over certain stocks (ahem, Best Buy), and I always stand ready to short such silliness.

Quick opinions:

S&P earnings: Analysts still have their heads in the clouds and the I-banks are still getting away with talking about “expected operating earnings.” NET NET NET trailing report earnings are all that matters, and those will fall under $20 and stay there for many months before they start to grow again. Put a PE of 8 on that Jackson for your stock market bottom.

US bonds: bearish but not shorting

US dollar: bullish

Euro and Swiss Franc: bearish

Yen: neutral

Oil: neutral but prepared to start shorting at 60

Base metals: neutral to bearish (will short again if higher)

Grains: still waiting to buy

US real estate: wait until 2012 and figure on a cash market, but maybe buy in late 2010 if you can still get a low fixed rate loan.

NYC real estate: wait a year longer than the rest of the US — amazingly, denial still runs deeper there.

Guns ‘n ammo: good to own, but worthless if you don’t learn how to use them intelligently.

Obama: To appease and distract the masses, will he be crucified like Nixon?