In my May 22, comments, I forewarned that the “bear market rally” was fading and that I would wait for more confirmation before becoming more deliberate in rebuilding bearish investment strategies into managed portfolios.

Unfortunately, today’s sobering unemployment report further validated my view that investors who were putting a bid under the stock market this spring were too optimistic in their expectations for a quick recovery in the economy and financial markets. The unemployment rate rose sharply from 5% to 5.5%, registering the biggest incremental rise since 1986. Before today’s report, the bulls have argued that there is no hard data to suggest endemic job loss in the U.S. economy. To paraphrase, “As long as consumers are employed, they will spend and sustain the U.S. economy.” That was a marginally defensible argument until this morning.

Of course, unemployment is a lagging economic indicator because most businesses tend to delay layoffs until well after business activity slows down. However, many other leading and coincident indicators were issuing warnings that employment numbers would eventually deteriorate. For some reason, the markets were surprised when the data was released and stocks took a nose dive. With a deflating housing market, faltering credit markets, escalating food and energy costs, weakening consumer confidence, and now, rising unemployment, it appears equity investors have little left to hang their hats on.

I want to reiterate that equity markets have been disconnected from fundamentals for some time. Generally speaking, rational fundamental analysis still does not justify the stock valuations on the broader exchanges. This is not a pessimistic view - only a conclusive reflection of the facts to which the market should inevitably concede. Market sentiment has already turned convincingly negative and stocks appear poised to fall hard. I’m beginning to scale into positions that stand to benefit from unfavorable market conditions. I will tread carefully.

P.S. The S&P 500 is down (-13.5%) from it’s all time high set on October 11, 2007 and (-10.94%) from it’s previous all-time high set on April 23, 2000 - over 8 years ago.