Friday was a bad day for the market to say the least. I actually sold in the middle of the afternoon and took a small profit on the stock picks positions I bought in January. I had bigger profits earlier in the week so it was a bit disappointing to sell, but in bear markets you have to take what you can get. It is very difficult to play the long side during a bear market. More money is to be made shorting, but we still need to see the market rally and get overbought on an intermediate-term basis in order to be able to short safely. At the moment I feel like the prudent thing is to be in cash.

You have to respect bear markets and be very patient for entry points on the long and short side. Bear markets do not forgive those who refuse to cut losses or get out when things take a turn for the worse. In bull markets people who don't cut losses often get saved when the market rallies to new highs. In bear markets there is no saving. There is just carnage for the masses and only patient and prudent traders can make money in them.

You have to be totally disciplined to profit in a bear market. Otherwise you are best to stay in cash and get back in the market once the bear market is over.

I just tried going long in expectations of a market rally that would take the S&P 500 beyond the 1450 level as part of a bigger stock trading strategy. Friday's action makes it likely that the market will get near its January lows, and possibly even break them, before the S&P 500 will go above 1450 now despite the fact that sentiment is overly bearish and the market became extremely oversold on a historical basis back in January. The market is acting in ways that I have never seen before and no one I know has either. A retest of the lows to form a double bottom seems likely now, but there is always a risk of a crash in this market. I never said that type of thing in the 2000-2003 bear market, but this one is ten times more dangerous than that one ever was.

I pointed out to you the other week that the market has never made new lows without first having a huge rally when it became as oversold as it did in January and the Investors Intelligence survey displayed widespread bearishness. But if the market doesn't turn around and bottom Monday it will poised to go to its lows. This would be something we have never seen happen before with the oversold conditions of January. But I suppose this may end up being a bear market like none other once it is over.

During this bear market we may see a secular top in long-term bonds, a record low drop in the dollar, and gold trading in the thousands instead of the hundreds. Oh, and we are going to see real estate prices decline 20% from their highs, a few large banks go bankrupt, and the Federal Reserve take "emergency measures" to stabilize the situation. We've already seen the Fed lower interest in the past few months at a faster rate than they have ever before - faster than they did during the Great Depression - and all signs point to more interest rate cuts to come.

The Fed created this disaster by lowering rates and keeping them low for too long in response to the 2000-2003 tech bust, that was itself a direct result of a bubble created by too much easy credit and artificially low interest rates in the 1990's.

As Warren Buffett explained Friday in his annual letter to shareholders:

"You may recall a 2003 Silicon Valley bumper stick that implored, "Please, God, Just One More Bubble." Unfortunately, this wish was promptly granted as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower's income and cash equity unimportant to lenders, who shoveled out money, confident that H.P.A. - house price appreciations - would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out - and what we are witnessing at some of our largest financial institutions is an ugly sight."

Now the Fed is totally trapped in a nightmare of its own creation. Or I should say the US economy is trapped. If the Fed does not continue to slash interest rates and print money like mad they risk allowing a deflationary credit implosion to throw the economy into a depression. But by acting as they do they risk the worth of the dollar and if their plan doesn't work may find them rolling the dice at the end game of hyperinflation. Like a desperate gambler they have no choice but to double down and pray to whatever God the Fed prays too. It certainly isn't the God of the bible who preached prudence, against usury, and dictated a year of jubilee every fifty years directed against money lenders to check their power and prevent inflation. Our problems exist now, because the Fed has bailed out Wall Street and banks over and over again at the expense of the real economy.

"There probably will be some bank failures" - Ben Bernanke during Friday's Senate banking hearing

As the bear market and economic unwinding continue Bernanke's answers to questions will get even more bizarre. Here he explains that he sees no inflation, because it isn't registering in the so called CPI numbers. He is so nervous and fidgety. Whenever he speaks the market drops. Same thing with Bush. But Bush never appears nervous. He seems to go out of his way to appear to be tough and macho. That's how he looked last week when he said the economy was bottoming thanks to his stimulus program that will hit it in a few months. It's as if he thinks he can will things to improve. It's same type of talk we've seen for years when he speaks about Iraq.

Back in 1999 and 2000 when I railed on Greenspan for creating that stock market disaster I used to say "no one was driving the airplane." Well now the controls on the airplane appear to be locked.

But that's enough editorializing. What about the market? What do the charts say?

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