NEW YORK (Real Money) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.

This past week, Kass wrote about the approaching "ah-ha moment" when the market realizes that the Fed is out of bullets; and 10 lessons he's learned about the markets amidst all this volatility.

Please click here for information about subscribing to RealMoney Pro.

The 'Ah-ha Moment' Draws Closer

Originally published on Thursday, Oct. 9, at 7:25 a.m. EDT

At worst, a bear market may be emerging.

Share prices have obviously benefited from massive liquidity and a zero interest-rate policy. The recent high-beta earthquake in which stocks sold off was probably the first shot across the bow. Increasingly, the market seems to be realizing that each progressive quantitative easing is having a more restrained impact on growth. With rates at zero, QE [quantitative easing] has become a blunt tool. The Federal Reserve has built a bridge to growth, but it can't deliver the destination on its own. And the flattening of the yield curve tells a story of slowing growth. There is about a 230 basis point [2.3 percentage points] spread between two- and 10-year Treasuries, compared with almost 270 bps at the end of last year. That's signaling muted economic growth. If growth fails to emerge in the months ahead, we'll see an ah-ha moment in which investors, to quote the singer Peggy Lee, say, "Is that all there is?"

--Doug Kass, "Preparing for the Bear's Return," Barron's (April, 2014) 

Last evening's closing column contained the following warnings:

While I have an overall cautious view of the market there is nothing definitive to say about yesterday's schmeissing and today's vigorous rally. 

Was Tuesday a 'one-day wonder?' Or was today a 'one-day wonder?'

Hard to say, though Jim 'El Capitan' Cramer ends his blog today with some observations on the subject.

As I have continually written, the only certainty is the lack of certainty.

Those that are certain of view (in either direction), and don't qualify those views, should be avoided like the plague.

The market is acting more volatile than the underlying fundamentaIs and it is starting to overreact to news (like today's not unexpected FOMC [Federal Open Market Committee] minutes). I remain of the view that this sort of volatility and uncertainty -- in a market that has no memory from day to day -- is not a particularly healthy backdrop to invest in.

And, as a friend (who is a lot smarter and richer than I am) remarked near the close: Historically, slowing global economic growth and rising equity markets are not a positive combination.

Stated simply.

In Tuesday's opening missive, "Throwing Down the Bear Market Gauntlet," I summarized an outline of my market concerns:

I have long worried about the bull market in complacency that has seems to have fermented with the sharp rise in valuations in 2013 (in which the S&P rose by more than 30% while earnings climbed by only about 8%).  

I see many peaks to consider. 

Since early August I have highlighted numerous technical divergences (in the weakness of the Russell Index, new highs, the cumulative advance/decline lines, etc.), the schmeissing of the high-yield market (often seen as a precursor to stock vulnerability) coupled with growing evidence of weakening global economic growth (posing a threat to consensus corporate profit forecasts) and other factors (including valuation, sentiment and geopolitics) suggesting that a downwards trend and (potential) bear market might be in the early state of developing.

History also shows that rising volatility in foreign exchange markets may be consistent with bear markets. (A good analysis by Nautilus Research can be found here.) 

Economic weakness in Europe has been a worrisome factor that I have steadily highlighted. As I have noted, the EU (and its banking system) face structural headwinds that are not being adequately addressed. 

The ECB, though impacting the euro and pushing European sovereign debt yields lower, doesn't have the hold on its equity markets that the Fed has had. Yesterday, Europe's strongest economy, Germany, reported weak August factory orders. Today, German industrial production dropped by an outsized 4% (compared with consensus of -1.5%). As a result, the German DAX is trading at its lowest level since mid- August, below where the index sold after the September interest rate cuts and 8% below where stocks sold before the June ECB [European Central Bank] meeting when Draghi took out the heavy monetary artillery. 

Over here, the domestic economy recovery (though subpar compared with prior trajectories) has been the recipient of unprecedented monetary largesse that has already begun to lose its effectiveness. The tailwind of QE is about to reverse as the Federal Reserve begins to consider raising the fed funds rate for the first time since June 2006. In doing so, our addiction to low interest rates (in both the public and private sectors) runs the risk of being exposed in 2015.

The advance in the S&P is also growing long in the tooth (having nearly tripled since The Generational Bottom in March 2009).

Finally, the average company's share price has been eroding for several months, even in the face of the senior indices being close to their all- time highs. 

Though federal funds haven't been raised since June 2006, investors continue to act like Pavlov's dogs, responding to the slightest changes in Fed verbiage -- even as, at the core, the comments referenced bad economic news. Buyers also failed to focus on this hawkish passage of the minutes: "A few members, however, expressed reservations about continuing to characterize the extent of underutilization of labor resources as significant."

One partial explanation of this behavior (and of Wednesday's market reversal) is the increased role of high-frequency-trading (HFT) price-momentum-based strategies, whose algorithms trigger to the word "dovish."

Algos react without analysis, so stocks again rallied vigorously Wednesday after the release of the FOMC minutes, seemingly based upon the notion that the Fed is slightly more dovish. 

The FOMC minutes, released yesterday afternoon, confirmed my global economic concerns, the risks to domestic sales and profits associated with a rising U.S. dollar (a form of tightening) and, most important, the growing limitations and reduced impact of an aggressive easing in monetary policy. 

Upon reading further, the FOMC minutes actually dismissed the dovish spin that provoked a rapid and substantial spike in stock prices yesterday: 

Lastly and in one of the more interesting sentences of the minutes, the Fed is implicitly acknowledging that with rates already at zero and a $4.5T balance sheet almost 6x bigger than in 2007, they said "the risks to the forecast for real GDP growth were still seen as tilted a little to the downside, as neither monetary policy nor fiscal policy was viewed as well positioned to help the economy withstand adverse shocks." The underline is mine. Another way of saying this is the Fed is out of bullets to deal with any lean downward in economic growth from here.

--Peter Boockvar, Oct. 8 Commentary

As I mentioned in my Barron's interview five months ago, I believe an "Ah-ha Moment" -- a moment of sudden realization and insight -- is growing closer by the day, as the Fed is out of bullets. So it might be written that the central bankers outside the U.S. -- who face structural, not necessarily cyclical headwinds -- are also out of bullets.

Insane in da membrane
(Insane in da brain)
Insane in da membrane
(Insane in da brain)
Insane in da membrane
(Crazy insane, got no brain)
Insane in da membrane
(Insane in da brain)

--Cypress Hill, "Insane in the Membrane"

The market's volatility is insane in the membrane. Volatility is expanding, and we are seeing an unhealthy randomness in overall price behavior, all in a market that has no memory from day to day. It is nearly certain that daily triple-digit changes in the Dow Jones Industrial Average are not the sort of stock-market backdrop that emboldens the average retail investor.

As I wrote earlier, market breadth eroded and leadership has narrowed. Though the major market indices are within 2% of their all-time highs, the average stock is down much more than that.

With the normal caveat that the only certainty is the lack of certainty -- It is my view that, at best, the market's reward-risk ratio is unattractive.

At worst, a bear market might be emerging.

At the time of publication, Kass held no positions in any of the stocks mentioned.

10 Lessons I've Learned Over the Past Two Weeks

Originally published on Thursday, Oct. 9, at 4:08 p.m. EDT

And some wise words from Vizzini.

    Never be self-confident in view, as the only certainty is the lack of certainty.

    Avoid (and never pay attention to) those commentators, money managers and analysts who display an over confident market and view. (For that matter, never ever trust Federal Reserve economic forecasts).

    At times, Mr. Market exists to screw the most people.

    The crowd typically outsmarts the remnants -- except at inflection points.

    Always pay attention to technical divergences during market rallies, particularly during the later stages of an advance. Narrowing leadership and a contraction of breadth are usually tell-tale signs of a maturing bull market.

    The relative performance of small-cap stocks (e.g., the Russell 2000 index) should never be ignored.

    TINA (there is no alternative) is a silly reason to be long stocks, as cash is a defensible asset class during almost all periods.

    Volatility is not the friend or companion of a bull market.

    Sometimes it is more appropriate to be concerned with the return of capital than the return on capital. Risk-aversion and preservation of capital should always be on your mind, as we never know (as Grandma Koufax used to say) when "the Cossacks are coming."

    And, of course, "Never get involved in a land war in Asia and never ever go in against a Sicilian when death is on the line!"

    At the time of publication, Kass was short SPY.

    Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.