Assuming for a moment you were a betting person, would you bet on the team least likely to win? How about if it has access to unlimited Gatorade?

Betting is about putting the odds in your favor. Sure, even the Detroit Lions could win the Super Bowl, but would you put money on 1:100 odds, even with unlimited access to Gatorade?

Just like betting, investing is a game of odds and probabilities. The unlikely may occur, but would you put money on the unlikely or on what’s historically probable?

Today, many are proclaiming the dawn of a “new bull market." In fact, being anything but bullish is not just unpopular; it’s considered to be outright foolish.

But where were the geniuses who now proclaim a new bull 13 months ago? When the bull market started, there were no bulls to be found.

Back then, the ETF Profit Strategy Newsletter was the odd ball out when it predicted the onset of the biggest rally since the October 2007 all-time high.

The March 2nd, 2009, Trend Change alert conveyed in no uncertain terms that it was time to close out previously recommended short ETFs like the UltraShort Financial ProShares (NYSEArca: SKF) and Ultrashort S&P 500 ProShares (NYSEArca: SDS), lock in triple digit profits and buy leveraged ETFs like the Ultra Financial ProShares (NYSEArca: UYG) and Ultra S&P 500 ProShares (NYSEArca: SSO).

The same herding mentality that caused 3 out of 4 investors to sell around Dow 7,000 is now compelling a majority of investors to buy at Dow (NYSEArca: DIA) 11,000. Is that smart?

Betting on a Black Swan in disguise

Don’t fight the Fed has become the new strategy. No doubt, easy money has been a significant contributor to the 75% rally in the Dow (DJI: ^DJI), S&P (SNP: ^GSPC), Nasdaq (Nasdaq: ^IXIC), and any other index or sector.

Never before has the Fed or the government spent such enormous amounts of money so recklessly. There is no telling what such spending will do. To some degree, the government’s spending spree is a Black Swan event. By extension, the effects of government spending – such as rallying equities – are a Black Swan event. Do you want to bet on a Black Swan event?

More certain than betting on a Black Swan turning into profits, are historic patterns.
Historic patterns show that the government has a spotty track record when it comes to intervention.

Consider the Glass-Steagall Act – a law designed to control speculation – which was established in 1933, one year after the Great Depression in stocks ended and repealed in 1999, just before the 2000 bear market started.

Bernanke running out of Gatorade

As late as in 2007, Mr. Bernanke stated that the Fed “does not expect significant spillovers from the subprime market to the rest of the economy.”

Rather than addressing bubbles, Mr. Bernanke allows bubbles to inflate but will then leap to ease the pain should a bubble burst.

Going into the 2007 downturn, the Fed and government had plenty of ammunition to fight an economic contraction. The budget deficit was $160 billion. The funds rate was at 5.5%. Today the Fed’s $2.3 trillion balance sheet is stuffed with toxic mortgages and the government is running a $1.4 trillion deficit. There is no more room for further rate cuts.

Perhaps it’s time to reconsider the notion that the Fed or the government can spend its way out of a recession. Easy money has certainly delayed the inevitable, but can it eliminate the inevitable?

History vs. Gatorade

The past few months have been an epic fight between sentiment readings and momentum. Thus far, momentum has carried prices higher and defied the validity of sentiment readings. For the market to move higher, it would have to invalidate many decades worth of generally accurate sell signals.

Here are a few of the extremes recorded over the past few months that unequivocally add weight to the sell side of the ledger:

- April 12, 2010: VIX (Chicago Options: ^VIX) drops to 15.58, the lowest level since July 2007.

- April 14, 2010: The CBOE Equity Put/Call Ratio drops to 0.32, the lowest reading in nearly ten years.

- April 21, 2010: Investors Intelligence (II) bullish advisors clock in at 53.3%; the highest reading since 1-12-2010 (53.4%) and December 2007.

- December 30, 2009: Investors Intelligence bearish advisors drop to 15.6%, the lowest level since 1987.

- February 2010: Mutual fund cash levels drop to 3.5%. This matches the July 2007 all-time low. The March report is likely to show even lower cash levels. Fund cash levels are a valuable contrarian indicator as they reflected the herding behavior of fund managers.

- March 2010: Investors’ cash allocation (polled by the American Association for Individual Investors – AAII) drops to 18%, the lowest level since March 2000.

- April 19, 2010: Buying climaxes spike to 467, one of the ten highest readings in 20+ years. Buying climaxes take place when a stock makes a 12-month high, but closes the week with a loss. They are a sign of distribution and indicate that stocks are moving from strong hands to weak ones.

- April 22, 2010: Insiders are selling nearly eight stocks for every one they buy. The eight-week insider sell/buy ratio is well above 4:1. Sell/buy ratios above 2.5 are considered negative.

- April 27, 2010: NYSE Arms Index (also known as TRIN) has moved above 1.35. This reading is quite high and usually indicative of an oversold condition (an anomaly at current prices). This means that stocks that decline account for most of the trading volume. According to SentimenTrader, the last time the TRIN has been above 1.2 at the same time the S&P 500 (NYSEArca: SPY) hit a one-year high was more than 50 years ago.

- April 2, 2009: The Financial Accounting Standards Board (FASB) is forced to change rule #157. This change allows banks (NYSEArca: KBE) and financial institutions (NYSEArca: XLF) to overstate toxic assets and sweep “unrealized losses” under the carpet. Earnings from the financial sector are thus exaggerated.

- April 2010: Earnings increases are based on cost cutting and lagging revenue growth. David Rosenberg reports that the surprise factor (the gap between expected numbers and actual numbers) for earnings is 21%. Excluding financials, the surprise factor would be around 10%. The surprise factor for revenue, however, is a disappointing 3% (including financials) and zip if you exclude financials. In other words, companies in general beat their earnings forecast but revenue is flat.

This lack of revenue growth suggests that consumers aren’t spending and that profits are still driven by cost cutting. Lack of consumer spending is easily explained by a look at consumer confidence and employment numbers.

After a fierce 13-month, 75% rally in stocks (NYSEArca: VTI), led by financials (NYSEArca: IYF) and technology (Nasdaq: QQQQ), consumer confidence has only managed to inch to 57.9 (according to the Conference Board Consumer Confidence Index), still the lowest level since the early 1990s. Unemployment is still around 10%, the highest level since the Great Depression.
 
Can Ben print his way out of the recession?

It is possible but not probable. Historically, there’s rarely been a more unified and more potent sell signal than today. Easy money has rolled over many signals or resistance levels that otherwise may have stopped the market. But we know the piper needs to get paid eventually.

For right now, momentum is likely to keeps stocks stable. Chances are a cluster of resistance levels not far above today’s level will soon repel stocks. Based on real valuations – such as P/E ratios, dividend yields and the Dow measured in gold (NYSEArca: GLD), the market is highly overvalued. Based on the above readings, it is not far away from starting its long and painful journey to fair values.

The ETF Profit Strategy Newsletter consistently keeps track of the above-mentioned indicators and many more purely technical gauges (like a master dashboard) to formulate a short, mid and long-term forecast.

A balanced, common-sense, out-of-the-box analysis is vital to avoid Black Swan events. As always, Black Swans arrive unexpectedly to most and no one is expecting a major market decline anymore; a great setup for dark poultry.