Depressed short interest is regularly a harbinger of an imminent slide in stocks

Stronger than expected economic data earlier this month had many believing that not only had we made our way out of the recession woods, but that we had actually arrived at the beaches of economic paradise.

Better than expected private payroll numbers, improving retail sales and small business confidence levels, and a climbing PPI all of these support the economy's recovery. Beyond the U.S., too, in the U.K., and China, manufacturing numbers have been strong, and German retail sales earlier this month surprised on the upside.

But is it so?
Had we actually arrived at the beaches of economic paradise?
The Bureau of Labor Statistics termed "an unprecedented rise" in long-term unemployment, i.e., things look very, very bad.  See below chart:

Also, consumer confidence levels dropped unexpectedly in December. Home prices continue to fall, the largest cities are seeing the biggest drops, 1.3% on average, over last month's report.  Millions of foreclosures are also coming to market and tight credit is still the major obstacle.  2010 will go down as the worst year for home sales in more than a decade.  And with mortgage rates continuing to go higher, the chances of a near-term turnabout are roughly zero. 

Consider, too, an important market internal: short interest.  The latest, mid-December reading shows overall short interest at levels lower than any time since the waning months of 2007.  Look here:
 

Elevated short interest levels are nearly always a precondition of a bull market, the opposite is also the case.  Depressed short interest is regularly a harbinger of an imminent slide in stocks.

Based on the longer-term phasing and valuation aspects, I belief that the advance out of the March 2009 low has been a bear market rally, this rally will ultimately prove to be a much longer-term bear market. Historically, Phase II declines are the most devastating and it is my belief that once this bear market rally has run its course, the Phase II decline will be far worse than what was seen between October 2007 and March 2009.

Don't be too greedy, just lighten your stocks holding when the market is still in a good shape, you may not have chance to get out of the bear gate when too many people are rushing out at the panic mode.