THE GLOBAL EQUITY DOWNTREND IS NOT OVER IN THE SHORT RUN, AND ESPECIALLY NOT IN THE LONG RUN (July 12, 2010): Recently, there has been a sharp increase in media bullishness toward the stock market, partly inspired by the strong rally during the past week. Do not be fooled. The most reliable leading indicators, such as 1) the behavior of the U.S. dollar index, which is completing an intermediate-term bottom; 2) the action in commodity-country currencies such as the Brazilian real, Russian ruble, Australian dollar, and New Zealand dollar, which have all been forming bearish patterns of several lower highs since the autumn of 2009; 3) the behavior of shares of commodity producers, which have been in significant downtrends since the first half of January 2010; 4) the action in U.S. Treasuries, which have been forming higher lows since the first half of April 2010--are all simultaneously confirming that the primary trend for stock markets worldwide is downward.

Another significant factor which is often overlooked is that since the S&P 500 index completed a 19-month peak of 1219.80 on April 26, 2010, there have been four days when this index gained over 3% on a single trading day. Powerful up days are very rare during bull markets, but are quite common during bear markets. While there has been an increase in bearish talk and sentiment, it's all talk and no action. When all is said and done, remember that a lot more is said than done. Investors are not putting their money where their mouth is: they are continuing to withdraw money from safe assets like money-market funds and bank CDs, and are putting their capital into high-yield corporate bonds, emerging-market equity funds, and similar highly volatile and highly risky assets. They are set to lose more than half of their net worth in these assets, just as they did two years ago.

There are millions of people who are following obsolete charting concepts from a half century ago. They believe that if the August 17, 2009 support level of 978.51 is broken to the downside for the S&P 500, then they should sell since the next support level is the July 8, 2009 support level of 869.32. Therefore, we are likely to get a brief panic as chartists and momentum players all simultaneously scream downside breakout and sell--including some short selling--with the intention of buying back at much lower levels. To their surprise, the market will go down to perhaps 950 as a result of their panic, and will then sharply rebound, thereby forcing them to cover at 1000, or 1050, or 1100. This will provide the only notable rebound over the next several months. Most likely, such a rally will begin in late July or early August 2010 after the selling panic has run its course, and will result in the S&P 500 climbing from 950 to somewhere above 1100.

The long-term direction for global equities can only be described as gloomy. During every past major bear market since the 1700s, the dividend yield on the S&P 500 (or its equivalent) has always gone above 6%. I highly doubt that this will be the first-ever exception to such a well-established rule. On March 6, 2009, when the S&P 500 bottomed at 666.79, its dividend yield was only 3.5%. In order to get to 6.0% or higher, the S&P 500 has to slump to 400 or lower. This may seem outrageously bearish, but if the S&P 500 index were to plummet to 400, it would still be higher (after adjusting for inflation) than its historic bottoms in months including June 1949, September 1974, December 1974, and August 1982, and far above truly depressed nadirs such as July 1932. The S&P 500 had slumped by 57.7% from its zenith of 1576.09 on October 11, 2007 to its bottom of 666.79 on March 6, 2009; I expect the current bear market to result in a total pullback of 60%-70% for this index by the time it completes its bottom in 2012, thereafter rallying strongly for several months in advance of the next U.S. Presidential election on November 6, 2012.