Don’t play chicken with Wall Street! The current market rally is a trap technically identical to the bear rally of May 2001, and just as dangerous.

Ever play mumbletypeg when you were a kid?

For those of you whose parents saw to it that you did not walk around with knives in your pocket, I shall explain that mumbletypeg is a game played by bored adolescents with too much time on their hands and not enough common sense.

The game is played in turns as follows: Each kid stands before his buddies, legs spread about shoulder width. And then you take your pocket knife (most probably given to you for some decent purpose like boy scouts or some such), and you throw it into the ground as close to your own foot as you dare.

Closest throw wins. And the guy who actually nails himself, just slams that thing right through his Keds so that it stands there quivering, embedded in flesh and bone, not only wins the game outright, but can claim bragging rights for the rest of the summer.

Yeah, it’s just as stupid as it sounds. Probably why we could never get the girls to play. Come to think of it, said girls wouldn’t even hang out with us until we finally got over such foolishness.

There’s probably a pretty decent reason for that, you know, something inherently Darwinian.

And yet, some kids never seemed to tire of the thrill of the game. And now that they are ostensible adults, they are playing it still… except now they do it by buying stocks in a falling market.

Heck, if you catch them in an honest moment (this usually requires about three tumblers of single malt) they even still call it “catching a falling knife.”

And if you thought sticking a knife in your foot was painful and stupid, it doesn’t hold a candle to trying to nail Wall Street’s perfect bottom. The former can be cured with a quick trip to the emergency room. Maybe you’ll limp a little for a while, but you’ll probably recover.

But the latter -- buying into supposed bottoms over and over, only to see your gains melt away like a snow cone on a hot summer sidewalk? That kind of foolishness can set back your portfolio for years, if not decades.

Let’s get one thing out of the way. I may have been one of those idiots out in back of the house taking pot shots at my feet. But I promise right you right here and right now: I will not play that sort of mug’s game with my money -- or yours.

Here’s the straight deal with bear rallies: Every time one happens, Wall Street’s cheerleaders will start the chant: “It’s a bottom, it’s a bottom! Stocks are cheap! Buy now and you’ll be set for life.”

And nine times out of 10, they are wrong.

I heard that same song and dance in the spring of 2001: “The bear is over! Buy now and get rich!” And you know what? Some folks even made a pretty nickel or two doing it. (At least for a while anyway.)

By May 2001, the S&P 100 had put on some 24%, and certain analysts were running around touting their favorite fantasy stocks all over again.

Now everyone knows the general parameters of how this story ended: The U.S. market was nowhere near a bottom. Instead it went on to double the losses it had already racked up.

Whole companies vanished. Fortunes were wiped out. CEOs went to jail.

And you want to know the real shame: You didn’t have to lose a nickel if you didn’t want to. In 2001, I used a simple signal to save both myself and my readers from the looming abyss that was to come.

I call it the OEX Comparative Average, and it may be the single most important indicator I can possible tell you about.

That May, when I looked to the S&P 100’s chart, I saw the seven-month average leading the 13-month average straight down. In fact, that 24% rally didn’t even close the gap between them. What’s more, price had just reached back up to the seven-month line.

This signal meant one thing and one thing only: Sell. Stocks. Now. Period.

And that’s exactly what I did, and what I advised my readers to do then, and what I am advising you to do today.

Once again, the clowns and talking heads claim day after day that the market is bottoming and stocks are cheap. “Look: GDP isn’t negative after all (at least not this month). Housing is up a smidge, while oil is only twice what it was a year ago. And those unemployed folks? They’re just slackers and whiners. They don’t deserve to have jobs, so we’ll just zero them off the books.”

I’m sorry, but no amount of crooked bookkeeping can change the fact that the banks are still coming up short. Heck, one of the biggest public piggy banks in the free world, Fannie Mae (FNM:NYSE), just confessed to losses that dwarfed anyone’s expectations.

And some fairly cool heads, like Graham Fisher’s Joshua Rosner, are warning us that even the $18 billion they have conceded is probably a bogus figure, with far more losses to come. Rosner also warns that there are backroom deals going down that could undercut any remaining value on some $5 billion in dubious bonds still lurking in the vaults at Citi and Merrill.

But that’s just the fine print, the details that historians will look at later when they write up the story of the crash of ’08. Just like in May 2001, The OEX Comparative Average Signal is telling us one thing quite clearly.

The S&P 100’s seven-month average is leading the 13-month average straight down. The recent rally has done nothing to close their gap. And price is approaching the seven-month line.

This is not mumbletypeg, folks. A Band Aid will not help you if you try to catch this knife. Once again I ask you: Sell. Stocks. Now. Period.

Sincerely yours,

Adam

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