The triumph of Dennis Slothower

Peter Brimelow

Commentary: Crash survivor remains bearish

By Peter Brimelow, MarketWatch

NEW YORK (MarketWatch) — The investment letter that evaded the 2008 Crash is now the top performer for 2011. It’s still snarlingly bearish.

I write a lot about Dennis Slothower’s Stealth Stocks Daily Alert because he, in fact, does publish every day — very convenient for journalists on deadline — complete with beautiful charts.

And he’s also distinguished by a quotably savage cynical view of financial markets, which he says loudly and repeatedly are manipulated by key players, including the U.S. government. ( See May 5 column. )

Slothower did indeed make money in the terrible Crash year of 2008. ( See Dec. 4, 2008 column. ) But, although he’s not a permabear and does make periodic opportunistic forays into the market, he’s been systematically skeptical of the rally that began in March 2009 — which has hurt his subsequent performance.

Not anymore. Over the year to date through September, Stealth Stocks Daily Alert is the top performer by Hulbert Financial Digest count, up 8.4% vs. negative 9.86% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. Over the past 12 months, Slothower is up 10.61% vs. just 0.58% for the total return Wilshire.

Over the past three years, which still includes the Crash of 2008, the letter is up 4.31% annualized vs. 1.49% annualized for the Wilshire. Over the past five years, it was up 4.28% annualized vs. negative 0.75% annualized for the Wilshire.

Slothower is still bearish. He wrote last night: “This spike rally isn’t likely to last long. The counter-trend rallies have lasted about 3 to 5 days until overhanging resistance is encountered. Then the short positions are flushed out, the bulls run out of gas, and down prices go again for 3 to 4 days as the weekly range tests the bottom of the trading channel. … Given this news [Steve Jobs’s death] and what is likely to be a rather poor jobs report due out on Friday, this rally isn’t on solid ground.”

On Tuesday night, Slothower dismissed the dramatic last hour rally as “the perfect short squeeze.”

He wrote: “This latest retreat in stock prices has allowed those brave traders who swim in volatility to enjoy tremendous gains using short positions. The danger with an average investor joining this game with inverse funds and inverse index ETFs is that you can easily become a victim of a short-covering squeeze, where high-volume traders (the Fed’s dealer and investment banks) can load up on cheap calls and then shuffle stocks between each other, spiking prices up and forcing those with short positions to engage in panic buying to cover their short positions, usually after they have given back much of their gains.”

Slothower himself had two short positions. He wrote last night: “We were stopped out of OpenTable Inc. OPEN +6.34% today, resulting in a minor gain. We are now 10% invested (Youku.com Inc. YOKU +16.38% short position) and 90% in cash/money-market funds, as the economy is now slipping into recession due to ‘oil shock’.”

And Slothower had a typical conspiratorial twist. He wrote: “I want you to notice that we are now starting to see Federal Reserve POMO [Permanent Open Market Operations] injections again. Yesterday, the N.Y. Fed created a $4.5 billion POMO injection, and today, a smaller one at $1.3 billion. A bunch more are now scheduled throughout October.”

“This $5.8 billion permanent liquidity injection goes directly to primary dealers. And suddenly today, we see a big spike in crude-oil futures. Even without permission of a formalized QE facility, the Fed can take it upon themselves to create liquidity as deemed necessary.”

“This POMO liquidity injection triggered short covering in the energy and commodity stocks. The U.S. dollar corrected today, gold jumped $25, and presto, the major indexes were up again.”

“How many times how we seen this familiar formula deployed to spike the stock market?”

“Yet, it hasn’t changed a thing on the global financial landscape. We remain well established in bearish territory, though riding it is like being on the devil’s tail.”