MarketWatch featured a piece with the subtitle “Are we revisiting 1998? Or 2001?” That is certainly a valid question given how the markets have been meandering from bullish to bearish territory, at least according to my Trend Tracking Indexes (TTIs). Here are some highlights:

There’s a sense of déjà vu in the market these days. The question we need to answer is whether it’s 1998 or 2001 we’re revisiting.

In January 2001, they began their series of rate cuts. The S&P;, saddled with capacity and littered with false hope, swiftly lost 40% of its value.

In my view, and to be a little bit more specific, we may be closer to October 2000 than to 2001. I remember distinctly the events leading up to October 13, 2000, a date which will forever remain with me. It marked the day that our domestic Trend Tracking Index (TTI) effectively signaled an all-out sell and we moved to 100% cash on the sidelines thereby avoiding the brunt of the subsequent bear market.

The days and weeks leading up to that Sell signal were not unlike what we are experiencing nowadays. The bubble had a different name, but it was a bubble nevertheless. Wild swings in the market, a few whipsaws here and there, and eventually a slow deterioration of stock prices lead to the crossing of the trend line into bear market territory.

It’s difficult to recognize a major change in market direction as it is happening. Just as on October 13, 2000, I had no idea that this was the beginning of a major bear market. Right now, we have crossed into that same territory again and only time will tell if this move to the downside will be sustained. While many fundamental indicators support this direction, we need to be patient before taking any positions that take advantage of this new trend.

When talking of trends in the market, you hear me reference my Trend Tracking Indexes (TTIs) every week. The reason is that they provide me with an unbiased view as to whether we are in bull market territory or have slipped below the trend line into bear territory.

Yesterday’s ISM report that its non-manufacturing index fell to a reading of 41.9 in January from a 54.4 reading in December represents a huge drop especially considering that economists’ expectations were for a number of 53.

While these numbers may not mean much to you, keep in mind that the dividing point from an expanding service business to one that is contracting is a reading of 50. So, similar to our TTI’s, a line is drawn in the sand indicating as to where we are at. Since the service sector accounts for some 90% of the U.S. economy, yesterday’s drop was devastating and the markets succumbed to the bears and suffered large losses.

As I mentioned in last Friday’s update, our TTI’s have been dancing around the long term trend line and, after yesterday’s close, they are positioned as follows:

Domestic TTI: -0.58%
International TTI: -7.82%

That means, we remain in bear market territory and will keep our cash positions for the time being until opportunities either on the long or short side present themselves.

Seeking Alpha had an interesting viewpoint titled “No Time For Complacency: This is a Bear Market.” While you may not agree, it’s a good read and it brings up ideas and thoughts, some of which I have discussed before. Here’s an excerpt:

This article is a follow-up to an article from two weeks ago that I wrote because I felt so strongly that we were due for a bounce. Well, while the bounce may not be 100% over, it is done for all intents and purposes. I am not suggesting that we are about to go into free-fall again (yet), but long investors shouldn’t feel as though that cash is burning a hole in their pocket. Further, those who missed punting vulnerable stocks now have a second chance to prune their portfolios of companies particularly susceptible to profit-margin erosion or lack of access to capital. I expect that the market will create an interim range that consolidates this move down since October before reaccelerating in the Spring and ultimately making lows this Fall (S&P; 500 1170 area).

So, after a very brief stay in the bull camp, I am switching back to the team that I continue to think will win this year in a big way. While I am not sounding the alarm at this time, I have started to put on some of my favorite short ideas again and have moved my net exposure via cash and ETFs to slightly negative.

If you’re of the opinion that there should be more government responses and programs, take a look at the video below, which features a recent interview with Professor Bob Shiller:

Random Roger had an interesting tongue-in-cheek post called “The Best February Ever.” Here are some highlights:

If we can average 1% per day for the month, like we are starting out we’ll have the best February ever.

I will say this type of volatile rally is consistent with bear market activity but maybe I do have it wrong after all?

That pretty much sums up the market behavior of last week. Bad employment news was totally disregarded, and the markets advanced as if there was no worry in Wall Street wonderland.

While I agree with the view that this is a bear market rally, I am also aware that at some point a continued move up may signal the return to bullish territory. However, I’d rather be a little late on the upside than being whipsawed and having to sell a few days later again.

Reader Jeff submitted an interesting blog post dealing with an old problem that you may have thought had long been resolved. This piece was written by Jake Zamansky, a NY attorney and titled “Front Running and Institutional investors.” Here’s what he had to say:

You would think that institutional money managers, who have a fiduciary responsibility to their clients, would also avoid doing business with any firms that engaged in organized wrongdoing and ripped them off. But that certainly doesn’t appear to be the case. There have been repeated incidents where major Wall Street firms reportedly have traded in advance of major trades they were asked to execute for their institutional clients. This practice, known as front running, gives brokerage firms an unfair advantage because they have insider knowledge that a pending block order will likely cause a significant price swing.

Rest assured, even if the SEC finds that Merrill was front running Fidelity’s orders, nothing much will come of it. The matter will be settled by Merrill agreeing to pay a relatively insignificant penalty without admitting any wrongdoing. It will, of course, get to keep most of its ill-gotten gains. The SEC neither has the resolve, or the resources, to take on a big Wall Street firm.

Additionally, current news reports show that firms like Merrill Lynch continue to be involved in lawsuits alleging improper sales of investments. There seems to be no end in sight as to how brokerage firms repeatedly work for their own gains without having the client’s best interest at heart. In the case of Merrill, I suggest they rename their TV advertising campaign from “Total Merrill” to “Total BS.”

For more on this subject, be sure to read Mish Shedlock’s piece called “Merrill Lynch Opens Legal Hornet’s nest.”

Bond insurers have made front page news lately in the face of severe Subprime losses and their potential downgrade from ratings companies. Calculated Risk reports as follows:

Standard & Poor’s Ratings Services today lowered its financial strength, financial enhancement, and issuer credit ratings on Financial Guaranty Insurance Co. to ‘AA’ from ‘AAA’ and its senior unsecured and issuer credit ratings on FGIC Corp. to ‘A’ from ‘AA.’ Standard & Poor’s also placed all the above ratings on CreditWatch with developing implications.

At the same time, Standard & Poor’s placed various ratings on MBIA Insurance Corp., XL Capital Assurance Inc., XL Financial Assurance Ltd., and their related entities on CreditWatch with negative implications. The ratings on various related contingent capital facilities were also affected.

Apparently that did not sit too well with MBIA, as the report continues:

Chief Executive Officer Gary Dunton mounted a spirited defense on a conference call, following MBIA’s quarterly earnings report, against “fear mongering” and “distortions’ that he said have contributed to last year’s dramatic stock-price decline. He also said that MBIA’s capital plan currently exceeds all stated rating agency requirements.

MBIA hasn’t been downgraded so far; this is just a move to CreditWatch with negative implications:

Despite the significant losses posted by the company, Mr. Dunton said, “there is nothing that we can identify that justifies the 80% drop in our stock price since last year.”

Hmm, what am I not seeing here? A company that has lost billions of dollars due to Subprime investments and the CEO can’t justify why the stock dropped some 80%? Maybe eating a little bit of humble pie would be a step in the right direction instead of sounding like a cornered rat moments before it’s being devoured. Or is a desperate offense a good defense?