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Below are excerpts from an analysis originally posted on our website on February 12, 2008 when the S&P 500 was trading at 1,339:

"I think the necessity of being ready increases." - Abraham Lincoln

Based on recent technical breakdowns in many risk-based investments (see Graph 1), the probability of investors incurring additional losses over an extended period of time has increased. Both the technical and fundamental outlook now favor bearish outcomes over bullish outcomes. In addition to the cash we have raised in recent months, it is now prudent to prepare for the possibility of adding additional hedging vehicles to our portfolios. While favorable outcomes are still possible, they are no longer probable. As illustrated in Graph 3, a continued slow migration away from risk and toward more bearish hedging vehicles may be warranted if conditions continue to deteriorate.

After we made the public comments above, the S&P 500 Index dropped 50% before finding an intraday low of 666 in March of 2009.

You can find the entire text of our February 2008 comments on our website here.

Another dated copy posted a few days later on Seeking Alpha can be found here.

The comments from February 2008 above describe the proper way to handle all transitions from a bull market to a bear market via a migration away from risk and toward cash, hedges, and/or short positions.

Research we published on June 12, 2009, with the S&P 500 trading at 946, also illustrates our ability to assess the probable shift from a bear market to a bull market:

The fact few are willing to call the current rally anything more than a bear market rally fits well with the historical profile of new bull markets. No one, including us at CCM, can definitively say a new bull market has or has not started - only time and future market action will tell. However, we can confidently state that what has transpired since the March 2009 lows compares very favorably with the end of a bear market and the beginning of a new bull market. How long a new bull might last is also something that can only be definitively answered in retrospect. While market conditions have improved, risk management must remain a significant part of any investor's game plan. Even bull markets can experience significant corrections.

Our job is to discern as best we can the prevailing risk-reward profile of any given market. The evidence at hand strongly supports a shift from unfavorable conditions for investing to favorable conditions for investing.

The charts are clearly stating that the collective fundamental outlook has improved greatly in the last 90 days. If the collective economic outlook was not greatly improved relative to prior expectations, numerous asset classes would not have received the conviction from buyers necessary to overtake their 50 and 200-day moving averages. What has happened since the March 2009 lows is most likely not a purely technical event. A purely technical event or a bear market rally from oversold conditions most likely would have failed long ago. If we are willing to listen, the markets are trying to tell us the next 12 to 18 months may not be as bad economically as many believe. The longer the markets can hold above their 200-day moving averages, the more significant the technical and fundamental signals become.

Since we published the public and dated comments above, the S&P 500 Index has gained 37%. Here is the entire text of our June 2009 research.

Another dated copy, posted on a third-party site, can be found here.

The Keynesian approach hopes the real economy can take the baton from government spending and money printing while keeping an economic expansion in place. With excess capacity and high levels of global debt, we remain skeptical the economy can stand on its own once the Fed and other central bankers stop priming the pump. However, we must always keep an open mind relative to bullish or bearish outcomes. If we pay attention to the current market without bias, the odds are very good we will never stray too far from the proper allocation, especially for long-periods of time.

Both fundamental and technical data can help us assess the probability of a successful hand-off once the Fed attempts to begin stepping away from near-zero interest rates and their bond purchase program termed QE2 (a.k.a. money printing).

We respect and understand your comments and the Board’s possible concerns related to our firm’s size. We believe the proof is in the pudding; our “two man show” did successfully identify when the odds shifted against investors in early 2008. We should have made money in 2008, but the volatility created by the government changing the rules several times while the markets were closed made it difficult to hold our bear market positions. Understanding a similar situation may arise in the next crisis, we developed the CCM Bull Market Sustainability Index and CCM 80-20 Correction Index to help us improve the way we manage and account for expected high levels of volatility, in both bull and bear markets.

Should another crisis unfold, we can better deal with extreme volatility and fear by (a) holding a relatively large cash/conservative bond/CD allocation, and (b) keeping a relatively small allocation to bear market and hedged positions. Had we done this in 2008, we would have most likely made money in a year the S&P 500 Index lost 38.5%. Any profit, even 1% to 5%, in 2008 would have been outstanding.

As I have mentioned before, all market participants had to manage money under the same circumstances in 2008. No one, including us, can make excuses or speak in terms of “would of, should of, could of” as it relates to the bailouts being announced over the weekend and subsequent rapid (and relatively short-lived) changes in market tone.

Our job is to understand what we did well in 2008, which included recognizing the odds had shifted against us and our decision to hedge/short, and understand where we need to improve, which speaks to building allocations that allow us to hold the proper positions even during extremely volatile periods. Another improvement we can make in the next crisis is to acquire hedged/short positions at more favorable risk-reward entry points, which will greatly increase the odds of being able to hold them even when the government changes the rules when the markets are closed.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes any representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.