Wow!  So much for a nice quiet week!  Following yet another 4% drop in the stock market (the 4th time in 2011), there is once again a heightened since of fear in financial markets that we are seeing a 2008 type of market.

-It is too early to tell & there is too many off balance sheet assets to know how exposed the financial system is to any potential stresses.  Even the assets on the balance sheet can be called into question because many are valued at their FACE value rather than the MARKET value -- including those held by the Federal Reserve.

This week I've been disconcerted that the reaction from Wall Street is much more like 2008 than 2010.  Last summer there was a general sense of panic that we were either already in or heading towards another recession.  With everyone so bearish, when the Fed announced their plans for the 2nd round of Quantitative Easing, the stage was set for a massive rally.

While we are starting to see fear that we are heading back into recession this summer, I can't get past the overall sense of complacency from the "experts" in the media and the Wall Street firms.  They keep telling us this is a buying opportunity, that the problems in Europe are contained to Europe, and that things are not as bad as they appear.

That may be true, but those same people told us the same things in 2008, including our Fed Chairman.

After the market closed last night, I had planned on writing something positive today about how everything was going to be fine, that things are not as bad as they appear, and that we could be forming a bottom.  Too late -- CNBC and Bloomberg spent last night and most of the morning so far today bringing out expert after expert that told us those things.

Remember when I asked, "Will Individuals be Left Holding the Bag?"  That was back in May.  I was concerned that we were seeing too many individuals being sucked into the market after sitting out the nearly 100% rally off of the March lows.  We also addressed this topic in our 3rd quarter newsletter.

Sadly, it seems that once again the individual investor bought near the peak in the market.  Inside that article we included a chart that described the stages of a stock bubble.

Last week there was a near record amount of money taken out of stock mutual funds.   If we are searching for a bottom, that could be a positive sign.  Maybe the panic is already over.

Unfortunately, I just don't have that sense yet that the panic is over.  On Monday when it seemed like the "all clear" signal had been issued, I couldn't help but notice how giddy everyone was at the rally.  There were many comments made that were along the lines of, "downgrade, what downgrade?"  

Last week I was optimistic that the attention given to the debt downgrade and some of the other problems was the beginning of actually fixing the underlying problems.  Unfortunately, both the policy makers and market participants continue to focus on the short-term.  Everyone seems to be living in denial and they seem to believe that all the problems will magically disappear.  The biggest concern to me is that the policy makers around the world are using the wrong model as they address the financial crisis. 

Even if the market rallies we have to remember:

Until everyone realizes those three things, any gains in the market will be short-lived.

I do not enjoy always pointing out the negatives, but there are just so many major issues that are being ignored by Wall Street, Congress, the media, and individual investors.  I look forward to the day where I can be the one pointing out the positives while they point out the negative.

Looking at the phases of a stock bubble and the stock charts, we could have a while before I am able to do that.

The 4%+ losses in the market are starting to become a concern.  DShort.com updated these charts last night.  As you can see, the large losses make this look much more like 2008 than 2010.

When you zoom out to 2000 you can see that we've now had as many 4% down days as we had during the entire 2000-2002 bear market.

My advice from the past few weeks has not changed.  If you have not been comfortable with the volatility in your portfolio you probably have too much risk.  Wall Street has conditioned us that it is "normal" to see these types of losses.  As these charts show you, it is "normal" to see them in an extreme bear market.

Market rallies should be used as opportunities to transition out of buy & hold investments and into something that has the ability to play both offense and defense.

Think back to the end of April.  We didn't realize it at the time, but that was the high for 2011.  Remember how everyone was so euphoric and positive that the slowdown in the economy was "transitory"?  You can see from the chart of the market since then what happens when the "consensus" expectations are adjusted.

So how big of a loss has the market had since the end of April?  16.35%

How has SEM's Active Risk Management handled it?  Check out the numbers below.

The consensus view today remains that the problems in Europe are contained and that the U.S. will not go back into a recession.  Should that not be the case, the market is likely to have more adjustments to the downside.  When the market peaked at the end of April we were still in "bullish" mode.  (We will never get out at the top.)  Since that time we've scaled our position down to nearly no equity exposure.

The market could (should) find some support in the 1120 range on the S&P and could launch another rally.  The important thing to realize is that no matter which way the market goes, we have a PLAN to handle it.  Do you?

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