Phase two of this bear market has been “long in the tooth” and, for the benefit of our over 30,000 new readers who joined PROFIT CONFIDENTIAL last month, I want to explain the three phases of a bear market, where we are today with it, and when we can expect the next phase to start (by which point we should all be out of the general stock market).

Bear markets start when they are not expected. In December of 2007, as investors and consumers were accumulating debt like drunkards to plough into real estate, at the point that investor euphoria was highest, a bear market in stocks was born. The Dow Jones Industrials fell from over 14,000 in late 2007 to 6,440 in March of 2009. We can pinpoint the exact day that phase one of the bear market ended as March 9, 2009.

Phase one of the bear market serves to take investor money away, to turn optimists into pessimists. By the spring of 2009, all the speculators of 2007 had their wallets cleaned out.

Phase two of the bear serves to bring investors back into the stock market. It works by giving investors the false hope that the worst is over for the stock market, the economy is getting better, and things are getting back to normal. Since March of 2009, the bear market has done an excellent job at executing phase two of its plan.

We’ve been in phase two of the bear market since March of 2009. It has been “long in the tooth” as they say, but it is not over. Negativity in the marketplace still lingers, the retail investor has missed the two-year rally in stocks, and we are nowhere near investor euphoria again.

In the short months ahead, investor confidence will continue to rise, more money will pour into the stock market and then, bang—phase three of the bear market will kick in. Phase three bear markets can take stocks lower than the original phase one did; in this case, below 6,440 on the Dow Jones Industrial Average.

I realize that many of my readers are thinking I’m crazing suggesting that the market could fall back to 6,400. Let me tell you, I’ve said crazier things that have come true. You would have thought I made no sense in 2006 when I said that the coming recession would be the worst since the Great Depression. Or you may have thought it hard to believe in 2002 (when gold was trading under $300.00 U.S. an ounce) when I said that gold was headed to $2,000 an ounce.

Bear markets take away the financial excesses of prior years, sometime prior generations. This bear market will be no different by the time it has completed its cycle.

Michael’s Personal Notes:

Yesterday, the price of silver marched to a new record high, close to $34.50 per ounce. But silver was not the only metal rising in price; gold is at $1,427 per ounce this morning after toying with a record $1,440 an ounce yesterday afternoon.

The rise in the price of these metals is telling us three big-picture things. First, the U.S. dollar will continue to fall in value against other world currencies. Second, inflation is a real threat. Third, the U.S. debt crisis will be a serious problem in the years to come.

Gold bullion is up $287.00 an ounce over the past 12-month period. The next step for gold is obviously $1,500 per ounce; the next stop for silver is $40.00 an ounce.

Many of my readers may not be aware of the fact that the Dow Jones U.S. Mining Index was trading at the 340 level in the summer of 2008. Today, it trades at 248. This tells me: (1) expectations for precious metal prices to continue rising are low, which is good for precious metal stocks; and (2) quality mining stocks have a lot higher to move in price before this bull market cycle in precious metals is over.

Where the Market Stands; Where it is Headed:

As a group, stock market analysts are a fickle lot. It’s only taken a difficult week of trading for analysts to start throwing in the towel on the market. Many investment newsletter stock advisors are now saying that technical damage has been done to the market for the up-trend in stocks to be broken. I don’t believe this.

Stock advisors were calling for a correction in stock prices and, now that we got one, they are jumping ship. As a contrarian, I’m sticking with my belief that we will see more gains from the bear market rally in stocks that started two years ago next week.

What will it take for me to turn outright bearish right now? I would need to see the 10-year U.S. Treasury yield over four percent (3.48% today), the market break towards 11,500, speculative euphoria break out among investors, or oil prices march towards $150.00 a barrel. Until then, it is more of the same for me: immediate-term bullish, short- to long-term bearish.

The Dow Jones Industrial Average opens this morning up 4.2% for 2011.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.