Montreal, Canada

Stay defensive and don’t let the tremendous month-to-month volatility in asset markets dissuade you from the big picture. That’s my message to investors in 2010. I’m still forecasting a massive stock market decline from now until late 2011; for most investors, avoiding the market altogether makes the best sense, unless you can successfully hedge your portfolio in the upcoming storm.

I’ve been bearish on stocks since late 2007 and remain a devout pessimist. I’ve outlined my case for remaining bearish over the last few years, namely the ongoing destruction of credit – exacerbated by government bailouts, ballooning sovereign government debt levels and the secular damage to household balance sheets caused by a crash in home prices and common stocks since 2006 and 2008, respectively.

I think even the most optimistic bull has started to sweat since May’s flash-crash. It’s obvious by now to most bulls that the cyclical rally that has occurred since March 2009 has run out of gas. Earnings expectations will have to be revised lower over the next 6-12 months – something the markets have yet to discount. That process of adjustment will be ugly. The bond market has begun this process but stocks are lost in the quagmire and remain the whipping boys of credit.

I think the stock market will post another decline this month before resuming a powerful short-term uptrend starting in late October or November that will last several months into March or April 2011. By next March you’ll want to be out of Dodge. And I’m talking far away from Dodge City.

The stock market will suffer a huge decline of at least 25% to 35%, possibly more, starting next spring through fall when a great bottom will occur. Historically, enormous bottoms have occurred in the fall. That’s when I plan on throwing almost all I’ve got into big bargains.

The odds favor a government-injected dose of specially-targeted stimulus this fall as we approach Congressional elections. Obama, who will hopefully be a one-term president, will massage the Bush tax cuts or/and introduce a payroll tax holiday in 2011. That’s the buzz in Washington now. I think such moves would be interpreted as very bullish developments for the market, triggering a monster rally later this fall and probably into 2011.

By the time we head into the spring of 2011, however, the fear of a double-dip recession will become reality as economic data starts to fall off a cliff. The bond market sniffs this now. That’s when market mayhem will begin in earnest and, possibly, deepened by one or more sovereign government defaults, a major bank failure in Europe and/or a Black Swan event that none of us can possibly imagine. This will be too much for the markets to swallow.

The buy-and-hold markets of yesterday won’t reappear until late 2011. From now until then, this isn’t a market for most investors to dabble. Unless you know how to hedge and protect your portfolio from severe volatility, avoid the markets until later next year. I’ve got a bad feeling about what lies ahead.