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Interim Cliff Diving Report
This letter will be quite a bit shorter than most. There is not too much to add to the mid-to-longer-term analysis of my former letter, and much of what I forecasted in the short term has come to pass. It is my hope to simply throw a quick warning flag out there as certain markets are showing record or near-record readings of optimistic sentiment and as my shorter-term views are coming to the potential close that I outlined. In this letter, I will very briefly cover many of the markets that I believe have experienced the majority of their counter trend rally and thus offer a high potential of reversing soon. I also attached a separate article I wrote to be released with the last newsletter but postponed due to the size of the last letter and constraints of the envelope.
The bottom line: Optimism in many markets is hitting an extreme. This is a strong coincident indicator of market tops. Now may be avery good time to get out or at least raise your stops snugly beneath current market prices to protect yourself from the potential reversal and downside. This applies to stocks, EUR, GBP, Gold, Silver, and Oil. Negative extremes are being reached for the U.S. Dollar, so I would advise against any short positions in this particular currency at this time. I personally expect a strong reversal in the near future, as negative extremes reached 95% as of last week. (95% of investors think that the dollar is headed lower.) Additionally, over 96% of investors think that the EUR is headed higher! Hopefully, by now,you can guess that I am comfortably betting the opposite.
In my last newsletter (June and July), I encouraged investors to utilize any temporary market rally to make a more elegant exit from equities at this time. I believe that we have seen the bulk of that countertrend rally thus far, and I believe that the current market position defines an elegant exit as investor optimism reaches multiyear extremes in multiple markets. Put more plainly, this is a great place to consider pulling out of the market. While the market could still rise a bit more (even with investor optimism so very elevated), any rise should be relatively limited and short lived. Moreover, the bulk of the risk from this point is to the downside and will likely remain so over the next few years. While I may be just a tad early on the warning, I find it is better to stop well short of falling off a cliff--no need to get right up to the edge. It is never to say that the market cannot go higher from here, but historically, the elevated levels of optimism that we are seeing right now are not sustainable over the long-term.
If you feel that the recent rise validates a bull market in the making, you agree with approximately 95%+ of all other investors out there (this being the recent optimistic sentiment reading for stocks). That was about the same optimistic sentiment shared by investors right before the market peak back in April of this year. You would also be in good company with the majority of investors back in October of 2007...right before the markets went off a cliff. Bull markets are not born out of elevated and widely held optimism. Bull markets are born in the depths of despair, with valuations much lower and with the crowd in general despising securities. We are far from the these negative extremes and are currently experiencing the perfect setup of a continued bear market with such elevated optimism. (See Figure 1.)
As an added touch, it was recently proclaimed across the media that the recession is officially over. (Just in time for the next one, I suppose?) The timing of this headline could not be more apropos. I believe that the public will widely hold such remarks in disdain within the next several years. Whatever the technical readings may be, one thing is for sure: Major magazine headlines such as "The Recession is Over!" typically are a strong indicator of a peak in consumer sentiment that corresponds with a peak in the stock market prices. While it is certainly not a guarantee, history has repeatedly displayed the correlation of extremes in optimism and stock market losses thereafter. Risk is far too high to be betting that this time is the exception to the rule.
Stock Extremes
Figure 1
As a quick summary, I am currently short the Euro, short stocks, short emerging markets, short financials, long the U.S. Dollar, avoiding long-term bonds, long a few select REITs and funds, short residential real estate, expecting gold and silver to turn soon (but still too cautious to short), and expecting the same of oil (though, again, too cautious to short with all of the geopolitical turmoil).
I will be putting out a much more extensive economic newsletter in late October or early November. Meanwhile, should you have any questions, please feel free to contact me via my email at jungerecht@jrwinvestments.com or via my office line at (626) 564-1031 ext. 112.

Best Regards,
Joshua Ungerecht
CEO and Chief Investment Officer
Written By: Joshua Ungerecht
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