By Heidi N. Moore
July 8, 2010

The market bears are more convinced than ever that it’s time to sell out.

by Heidi N. Moore, contributor

The markets may rally a lot these days, but the country is still in a bearish kind of mood. White House press secretary Robert Gibbs recently danced around the issue of a double-dip recession, and Peter Orszag, the head of the Office of Management and Budget, is rumored to have quit his job in disgust with the massive national deficit.

Adding to this, the stock market has been doing some odd things lately, with 200-point jumps and bizarre drops and suspicious-looking rallies and flash crashes. We thought it might be time to get a view from a market bear.

It was bracing. Basta! says United-ICAP chief technical analyst Walter Zimmermann, who has been urging his firm’s clients to “evacuate the stock market” since 2007 and renewed his warning this year.

Zimmermann, whose firm’s clients include energy traders and institutional investors, is a big believer in the bearish view. (The whole bulls-versus-bears thing is a little like stepping into the L.A. gang wars, we know, but if you want to wear your colors and throw gang signs, that’s what the comments section is for.) His basic message to investors is an old one: if you can’t take the heat, get out of the kitchen. Dig a little deeper, though, and he’s really saying that the kitchen is about to go up in flames.

Zimmermann explains his bearishness by citing his technical belief that we are not in a double-dip recession, but a “triple-dip recession.” The difference is that he starts counting during the market’s movements back during the tech bust years of 2002 to 2003 – the first dip, in his view – and after the second dip of 2007-2009, he believes we’re in for more. “The technicals indicate new lows ahead if the 878.00 level [of the S&P 500] is broken from here.”

The possibilities he sees next are a depression brought on by deflation – he notes that copper and steel prices are imitating the softness they saw in 1930 and are signs of a pullback by China, which we are heavily dependent upon. In a best-case scenario, Zimmermann suggests there may be a repeat of the congested, go-nowhere market of 1965 to 1985.

So, in his view, any way you slice it, the stock market is not a place you should be. “The risk is too great. It’s just not worth the heartache of giving back gains,” said Zimmerman, who quips that investors have already seen their 401ks become “201ks.”

This might seem extreme, but Zimmermann is hardly alone. There’s a bearish zeitgeist out there, certainly in the short term. Legendary commodities investor Jim Rogers says he is short stocks (and long commodities). Permabear Robert Prechter, who uses Elliott Wave principles to analyze the markets, also predicts dark things for the markets. The American Association of Individual Investors, which tracks market sentiment, found that 42% of its members are bearish and only 25% are bullish.

Is getting out of equities really the answer? We wondered if diversification would help, and the answer that came back was: no. Zimmermann says his firm’s theme is “one big market, one big mess.” He went on, “Diversification only works in bull markets; diversification doesn’t work in a bear market because everything is linked together. One always has the option of pulling out of a market that’s not trending and wait for signs of improvement.”

The real surprise to us was Zimmermann’s answer to the investing dilemma: T-bills. U.S. Treasury bonds, with their odd behavior this year on top of a record national deficit, have fed something of a controversy lately. Many, including Fortune‘s Allan Sloan, make strong arguments for why the Treasury run-up shouldn’t be trusted.

Zimmermann’s comeback is that investors have limited losses on Treasuries. “Maybe you wouldn’t get a return on equity, but you’ll get your principal back. That wouldn’t be the case if we see another dip in the stock market. You’re not at risk of losing your return on equity, you’re at risk of losing your equity,” he said.

–Heidi Moore is Sweeping the Street while Colin Barr is on vacation.

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