Written by Patrick Shea, CEO of MarketPicture.com.

You're dreaming you're a new soldier going into battle. The Army, Navy and Marines help boost your confidence, even as you face thousands of enemy troops all lined up in perfect order. You still feel invincible because the greatest military power in the history of mankind is behind you.

Just before the battle begins, you glance back for one last reassuring look at the vast force supporting your effort, only to discover that you are alone! There is nobody there, and the panic starts to rise.

Then as you turn to face the enemy, you find that your supportive armed forces are now joined with the enemy against you. Being the eternal optimist, you gulp and pray, "Thank you God that I only have to die once instead of the 1,000 deaths possible here."

If you're an individual investor, this analogy may ring true after you read the 7/11/00 Commodities Futures Commission (CFTC) S&P 500 Commitment of Trader (COT) report. If not, you may not realize that the CFTC, which is responsible for overseeing the futures markets, issues a bimonthly report detailing the ownerships of various futures contracts. Ownership is listed in three categories: Commercial (the largest institutional players), Non Commercial (large speculators) and Non Reportable (small speculators, sometimes referred to as "cannon fodder" because they are almost always wrong).

The "almost always right" Commercial hedgers have the money and leverage to dominate the large and small speculators. Many traders have found success in following and selling with them instead of opposing them. In the soldier nightmare analogy, the Commercials would be the Army and the Navy.

The large speculators also carry plenty of money power and leverage, but not to the extent of Commercials. These "specs" are like the Marines-small in number, but great fighters.

The small traders, who have been skipping down the sidewalk during this mega bull market without a care in the world, have enjoyed the monthly brokerage statements that reflect a higher month end value. Their confidence has leapt ahead, resulting in increased purchasing based on expected returns. They reason, "This bull market is going to last forever and we expect 20 to 30% annual appreciation, don't we?"

As small investors page through the S&P 500 COT report, a curious item catches their attention: the Commercials who bought and held the S&P contracts during the bull market are gone. Not only are they gone, but they are net short! "Uh oh!" small investors say, "But at least we have the large speculators on our side, right?" They are short the market too! Who's long the market if they are all short? The answer is the "cannon fodder," again.

Below is an analyzed chart displaying the heavy selling vs. heavy buying of the commitment of traders report. (Analyzed charts are ordinarily for Marketpicture members only.)

Steve Briese writes in the 6/19/00 edition of The Bullish Review a publication devoted to interpreting the COT report, "Commercials have an exemplary long term record of calling tops and bottoms in this stock index. They are currently more bearish now than at market tops in April 1998, October 1997, January 1992 and October 1997." The Bullish Review goes on to say, "Small traders are carrying a record net long total. This is the quintessential stand off between big money and small-change players; between smart money and the ill informed; between trend makers and trend followers. And we cannot see this thing ending other than badly for the bulls."

Is a market nightmare about to happen? Entering the fall season, indications are that we may experience a big down turn. What should investors do to protect their positions?

At MarketPicture.com, we suggest maintaining the conservative equity allocation originally recommended in January. Continue to:
  1. Overweight fixed income investments vs. equity

  2. Overweight large cap value vs. the large cap growth equity portion of a portfolio.

  3. Close all margin positions immediately and be especially wary of NASDAQ and Technology stocks. Within the tech sector, reduce or eliminate exposure to Internet stocks.

    If a market nightmare is about to begin, we should see evidence of it by the week of 8/7/00 based upon market structure. In the coming weeks, we will follow this potential "nightmare" scenario closely. Until then, say your prayers and watch out for friendly fire.