Here's some reasons why I'm bearish and think stock markets are going lower.

• The first two are the VIX and the TED spread. The VIX represents the volatility in the market, and the TED spread represents both a liquidity level indication and a fear indication for preservation of capital. That is, people are looking for a return OF capital over a return ON capital.
  
  I would be very careful going long (buying stocks) when the VIX is above 20 and the TED spread is above 50. A VIX level above 20 shows that there is a lot of volatility in the market. During a bull market (Stocks trending higher), the VIX is usually quite low. When there is a bear market (Stocks trending lower), the VIX increases.
  
  
  
  
• Consumer Confidence
  
  Consumer confidence levels are at a point that has only been this low in the last 30 years during recessionary times. No ifs, ands or buts... this is a dangerous sign, and quite a clear indication that we are very, very likely heading into a recession.
  
  
  
• Home prices declining, -10.7% change in value in just one year. Attached is the chart of a relatively new index that shows the Percent change YoY (Year over Year) in median home prices in 20 major US cities. Clearly this chart shows a downtrend in home price appreciation.
  
  
  Now looking at the next chart.
  
  You can see that it is not common for the direction of home prices to change, and the changes are not sudden. So for the price declines to stop will not common suddenly and we will not have a "V" bottom. That is a sharp bottom. The bottom will likely be a "U" or even "L" shape, where the bottom is reached and stagnates at the bottom for an extended period of time. Anyone that tells you that we have "Hit the bottom" absolutley is wrong. We hit the bottom when everyone is too depressed to say we hit the bototm (Trading rule #17). Note that if you bought your house in March 2005, your home is probably worth the same amount right now. 3 years and a 0% rate of return. Pretty good eh? Glad I don't own real estate either.
  
  Article on the latest data release on the index http://www.bloomberg.com/apps/news?pid=20601087 &sid=aC2LD_tpEYss&refer=home
  
  How low will prices go, Drop in half is quite possible
  
  
  So what happens if home prices drop down? Well, let's overlay the NAHB (National Association of Home Builders) index over the S&P, what do you come up with? Well, a highly correlated comparison in the last 10 years, that's what!!! So as home prices and volume of sales decrease, so will the S&P.
  
  
  
  
• New homesales declines lead to a recession
  
  New home sales are dropping fast too, not just current home sales. Note that when there is a sharp decline in new home sales, we head into a recession. Very consistent since 1971.
• Civilains unemployement, whenever the increase of people unemployed for 15 weeks or over starts ramping up into positive territory, we head into a recession. EVERYTIME since 1950.
  
  
  Not as obvious there on the percent basis change, but it broke positive, and each time it breaks the positive mark, we get a recession.
  
  
  
• But Peter, interest rate cuts will save the market, and prop it back up. Oh really?
  
  Looks like the market tends to go up when the FED raises interest rates, and goes down when the FED lowers interest rates. Why? Because the FED lowers interest rates when there is a problem. I also predict that the FED will continue to lower interest rates. FED funds futures predict likewise.
  
  
• No recession in the last 30 years has had a stock market correction of less than 20%. We have not had a correction of 20% yet. There is more to go. Last correction was just "tech stocks" and the correciton was roughly 40%. This time we have a housing depression (as CNBC declared), we have banking problems, credit market problems, consumer spending is down, consumer sentiment is down, and various measurements that have not been activated by the FED since the 1930s (AKA THE DEPRESSION!!!) To be buying and holding stocks now seems like a very risky move.

OK, so a recession is coming, what should I do?

I would say, short some overpriced shares. However, this is written for people that are not active traders. Shorting can be tricky and timing is important. Luckily, there are now inverse ETFs that allow one to buy into and make a profit as the market goes down. My four favourites are:

• TWM - Bet that small cap companies decrease in value
• SRS - Bet that REIT (Real Estate Investment Trusts) decrease in value
• SDS - Bet that the S&P 500 index decreases in value
• DXD - Bet that the Dow Jones index decreases in value

Links

Glossary

VIX
Value http://finance.yahoo.com/q?s=%5EVIX
Description http://en.wikipedia.org/wiki/VIX

TED
Value http://www.bloomberg.com/apps/quote?ticker=.TEDSP%3AIND
Description http://en.wikipedia.org/wiki/TED_spread

ETF
Description http://en.wikipedia.org/wiki/Exchange-traded_fund