Kass: Short Side Never Looked So Good

1. Brokerages and money center banks are rolling over badly and remain a negative short-term market tell.
2. Hedge fund net-long invested levels (61%) are at the highest level and the AAII survey has bears at the lowest level since December 2004.

3. The daytrading in the Chinese market has begun to eerily resemble daytrading in the Nasdaq, which peaked seven years ago. (The more things change, the more they are the same, though the location changes.)

4. Virtually every hedge fund has the yen carry trade on its books, and recent signs in the currency markets indicate that the trade is getting less compelling. (If it does begin to unfold, the young hot money -- especially in the emerging markets like China -- could reverse in a nanosecond).

5. Further signs of speculation are the press mentions (and market reactions) of far-fetched takeovers. A classic example was Monday's item in England's Sunday Express that Dow Chemical(DOW Quote) might be acquired by a private-equity group. The shares briefly rose by 8% in response.

Two weeks ago, England's Times of London published a report that Countrywide Financial(CFC Quote) would be acquired by Bank of America(BAC Quote). Again, the shares rose by nearly 10%, though they have subsequently declined by nearly 15% as subprime problems have grown. The outsize reactions to less-than-legitimate sources is typical these days.

6. History shows that four-year extensions of bull markets, out of deep oversolds, often morph into disaster: 1932-36 (1937 crash); 1957-61 (1962 crash); and 1982-86 (1987 crash). We're well into four years in the current stretch.

7. Writing again on history (and technical voodoo), over the last century every decade has seen a market crash/deep correction in the sixth or seventh year of that decade.

Above all, the lifeblood of the bull market is the availability of credit, and the subprime issues (dismissed by most, not surprisingly) are putting a halt to lending that for years has disregarded creditworthiness and plain common sense. As night follows day, personal spending will plunge just at a time when most believe the consumer is invincible.

The opportunities on the short side have never been more attractive, just as the signs of a breakdown of the impressive bull market run have started to appear -- a potentially lethal combination.