We'll take the liberty and extend Paine's playbook to the markets. We believe the "simple facts, plain arguments and common sense" all weigh in strongly in favor of an end to the counter-trend bounce and resumption of the next leg of the "Great Bear Market of 2000-200[?]", now.

Investor bullishness has rallied to an extreme with the markets. The American Association of Individual Investors reports 63% bulls, a level not seen since early 2002. Let's recall that in January 2002 the Nasdaq completed its strong bounce from the post September 11th lows. The Nasdaq peaked at 2,099 on January 9th, and proceeded to plunge almost a thousand points into the October 2002 lows.

Technically, complacency and confidence in the marketplace is at extreme levels. The VIX has been below 25 for the last two weeks. The last such run was almost a year ago, preceding the 600 point, five month plunge from May to October.

The markets are in one of those wildly bullishness "bad news is good news" frames of mind. (As contrarians, we see such bullishness as a strongly bearish indicator.) For example, Friday's report that the unemployment rate increased to a 9-year high spawned a 2% rally. CNNfn rationalized the rally by stating "Some found comfort in the fact that the number of jobs lost in April [48,000] was actually smaller than the expected 53,000 forecast." Huh? The monthly unemployment data is but a figment of some bureaucrat’s imagination. The calculations are riddled with all kinds of subjective adjustments (some politically motivated), outdated and outmoded models, seasonal adjustments, and all kinds of fudge factors. To justify a rally on a trivial  difference in highly imprecise data is manifestation of extreme bullishness.

Similarly, consumer confidence has soared in the last two weeks following the military success in Iraq. The Conference Board's Consumer Confidence Index, which had been on the decline all year, soared in April. The Index now stands at 81.0, up from 61.4 in March. This huge, emotionally charged surge in optimism is the largest one-month increase in at least 12 years, and is another manifestation of extreme bullishness.

Complacency and confidence in American society at large is also at an extreme. For example, and despite a wretched local economy, in Denver the upper crust is "partying like it's 1929." Flappers, gangsters and bootleggers are all the rage. As if they didn't know what followed.

Lastly, but of primary significance. is the Elliott Wave pattern, which strongly indicates that a reversal of the counter-trend bounce is imminent. Here's our take on the DJIA:

The last leg of the rally (wave C of 2) may have a few more small degree zigs and zags still to go over the next few days. A break of key support at the recent wave B low of 8,000 should confirm that the expected large wave 3 to the downside is underway. Only an unexpected surge above key upside resistance at the larger wave 2 peak around 9,000 would send our bearish case back into hibernation (though not into the grave).

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