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sponsored by: The Speculator A bear awakens feeling bullish We stir from our four-month portfolio slumber to find sentiment bearish and signals bullish. Guess which way we’re leaning. By Victor Niederhoffer and Laurel Kenner Rip van Winkle, the brilliant invention of early American author Washington Irving, escaped the vicissitudes of farm life and his shrewish wife by taking long strolls high in the Catskills with his faithful dog Wolf. It was on one of those expeditions that he drank with the shades of lost explorer Henry Hudson and his crew and fell asleep for 20 years. New stock picks from market professionals every day on CNBC. Back on May 3, we went to sleep ourselves, in a manner of speaking, because we were troubled by overly optimistic talk down in the village of lower Manhattan. We sold all our stocks and advised readers to do likewise. As we wrote then: All things considered, the degree of optimism is too high for us, since it borders on the kind of exuberance that has led to agonizing recriminations in the recent past. To the extent that any of you have followed the repeated bullish forecasts that we gave when the market sentiment was quite pessimistic and stocks were regularly setting new lows, we would suggest taking your fortune and converting it to cash equivalents until fortune once again becomes threatening. We note that from May 3 through Aug. 31, S&P 500 futures declined 10%, the Dow ($INDU) lost 6.8% and the Nasdaq ($COMPX) lost 17%. Today, we're not bearish any more. We have plenty of reasons that we'll enumerate in this column. For starters, we find that sentiment has changed in the village. Join Old Rip van Niederhoffer as he rubs his eyes, clambers back down the hills to his house, hugs his daughters and hastens to the village inn, where he finds the local sages in a highly excited state verging on panic. (Our village inn is as fictional as Washington Irving's tale, but our characters -- readers of this column who have taken time to write -- and their comments are real. We have merely taken the liberty of making them Dutch by inserting "van" before their last names.) The burghers are bearish The news, they told him, was quite bad. They showed him the latest Wall Street Journal headlines: "Investors Fear Stocks Will Fail Latest Test." "Don't Expect a Switch to Lush Returns." A printout of an Aug. 30 story by Lance Lewis on Prudentbear.com held the same message. "It's unfathomable to think we can have the biggest bubble of all time, and then have it gently deflate," the story said. "We have yet to see any real fear. Consequently, I think you can count on a panic developing at some point, and it could come sooner than most expect." On the bench outside the inn door, Alan van Abelson, village patriarch and lifetime bear, was holding forth. "To get a decent move upward, we first need a spasm of climactic selling on heavy volume," van Abelson was saying. "That would set the stage for the bulls' last romp. It would provide the investing masses with a chance to get out, though alas, they'll likely view it as a chance to get back in. After the rally runs its course, the bear will be back, bigger and uglier than ever." The others nodded. They were traders, mostly, in and out of the market. But to humor van Abelson, they took up the bearish theme. Said Rip: "Paul van Lewis, you've been on the West Coast. How does it look?" "Like the financial Armageddon of the millennium. It's really another example of the Gold Rush of 1849, except this time it began in 1969 and peaked in 1999. I think we are starting a very volatile and dangerous time. I see a huge wave of layoffs starting to affect manufacturers, investors, retailers and homebuilders across the country. Doesn't mean anything good for investors." Rip's brother, Roy van Niederhoffer, spoke. "I saw a study postulating that both the Atlantic and Pacific Ocean oscillations have flipped to a more negative mode for the U.S., meaning colder temps and more severe weather, for the next 10-30 years." "Always bad for the market," nodded the group. John van Lamberg pulled out a chart showing a sawtooth line. It was the Dow in constant dollars since 1890. The last leg pointed down. "The market tends to oscillate on a long cycle of about 30 years," van Lamberg said. "Look for a bottom in 2014." "Bad," said the group. "Very bad." "My main concern is the dollar weakening, which leads to inflation and foreign funds unwinding their U.S. equity positions," said Leonard van Kreicas. "A reversion to the mean would bring the Dow to 7,000, which is spooky." "I bailed out on June 5," said Jack van Tierney. "I believed P/Es were still too high, the brokers too frantically optimistic, the rate cuts weren't working, the dollar would not hold, consumers would tighten their fists, there would be a Mideast war, Argentina would default and that any money individuals get back from federal tax cuts will be taken by increasing state taxes. What's more, homeowners are looking less at their residences as piggy banks and more as ATM machines." The village shrink, Dr. Brett van Steenbarger, handed some papers around. "Twenty-three percent of respondents in the American Association of Individual Investors poll are bearish; 31% of those in the Investors Intelligence poll are bearish. Neither poll shows a recent spike in bearishness, as in prior bottoms," he said. "The coffee pot talk among the doctors is nervous but not panicky, and still focused on ‘when the market's coming back.' No one has bailed out; everyone's gritting their teeth and holding on because the market is always a good long-term investment." Why we say otherwise In short, there are plenty of reasons to be bearish, as illustrated by the contributions above. But where bulls fear to tread, we rush in to trample the grass. There is no better time to buy than when panic is in the air. The market needs to ferret out weakness so the weak people will contribute to its upkeep. A lot of people who are holding stocks that are 40% and 50% down have been calling up their brokers for advice. The typical broker said, "Hold on, but if the market goes to new lows -- if the Dow Jones Industrial Average falls below 10,000 -- better get out." Last week, people said, "The Dow is below 10,000. I don't want to worry about this while I'm on holiday -- I'm going to put all my money into bonds." On Tuesday, of course, U.S. bonds dropped 1 20/32, the worst decline since May 11. And in the morning, stocks soared, consistent with the usual pattern of strength at the beginning of months. (During the afternoon, however, S&P futures fell 2.4% from their high to close almost unchanged, and the Nasdaq dropped 3.6% from its peak to a five-month low. Note the diabolical tendency of the market to forever shorten the usual patterns.) What does it all mean? Has the annihilation been accomplished? We took pencil to paper, and found: As of Labor Day, stocks were at a 20-day low and bonds were at a 20-day high. On the last 35 occasions this was true, the expectations were for a rise of about 2% by 30 days later. The correlation between last year's monthly change in the S&P 500 futures and the corresponding month this year has been -0.4. Last September, the futures were down 6%. That makes the expectation for this month up 2.4%. The market tends to reverse in September what it did in August. The last five times that August was down, the average change in September was 3.4%. The three-month change in S&P 500 futures is now -9%. Declines of that magnitude have occurred only six times in the last decade. In five of the six cases, the next month was up, with an average change of 3.3%. The only skeleton in the closet was the massacre that U.S. Treasurys and German government bonds suffered on Tuesday. Taking all the above into account, we humbly forecast that after the past 18 months of struggle, we are due for a swig of bullishness from the flagon of the market bulls. We have prepared a worksheet of the actual moves in the third month following all combinations of the previous two months' moves, and will be pleased to send that to all global villagers who write to dciocca@bloomberg.net. MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.