Montreal, Canada

In 2008 investors earned big profits shorting or betting against global stock markets. Reverse index funds gained more than 40% in the United States last year; exchange-traded-funds, or ETFs, that employ 2x leverage surged more than 80%. Shorting emerging markets netted more than 65% in 2008.

But with stocks posting their biggest rally in more than 100 years since March, betting against stocks has been a near-disaster in 2009. The same reverse-index ETFs that logged big double or triple-digit gains last year are now selling at 52-week lows.

According to Credit Suisse-Tremont, the widely followed hedge fund tracker, only managed futures and dedicated short-selling strategies have lost money in 2009; both were among the only alternative indices to post gains in 2008. The CSFB-Tremont Dedicated Short-Bias Index is down 19.3% through October.

Indeed, this has been a frustrating year for the bears -- myself included. I doubt most investors would have expected a rally to last thing long and without a significant correction. My bearish bets this year on China and the emerging markets all backfired; betting against the S&P 500 Index also disappointed.

China, I believe, is the biggest short-sell speculation this decade. This country has a stock market that remains totally disconnected from its economy; the Shanghai bourse has crashed twice this decade whereas the economy has remained largely resilient. Chinese real estate stocks are especially expensive and trade at ridiculous multiples. Yet Shanghai continues to power ahead. FXP, shown above, is now a whopping 96% below its all-time high.

So what's driving this freight-train? Are stocks in a secular bull market?

The only real compelling arguments supporting stocks at this point are super-low interest rates and walls of government cash boosting global liquidity. Investors are being forced back into stocks because rates are basically at zero. To be sure, bond funds are taking in the lion's share of the mutual fund business this year with stock fund inflows only turning positing several weeks ago.

Corporate earnings have improved after crashing since 2007. Yet it's hard to envisage a sustained earnings recovery without a vibrant American consumer and fractured bank credit intermediation. Small stocks are rolling over since November. Large-caps are finding support and might continue to run because S&P 500 Index companies are flushed with cash and are receiving a boost from a weaker dollar overseas. But investors are paying dearly for future earnings and tiny dividends. Insiders have also been huge net sellers of stocks since August.

This market reminds me of the latter stages of the 1990s technology mania whereby more than 80% of all mutual fund inflows were recorded about 24 months before the market topped. The same might happen now because increasingly, investors are feeling left out and want a piece of the stock market pie.

As for me, I prefer to hold some reverse index funds and continue to under-weight equities. The only stocks I'm buying lately are utilities, food and beverage and alternative energy shares. Volatility is cheap, so I'm buying the VIX, managed futures funds (CTAs) and even intermediate-term Treasury bonds. All three strategies posted losses in 2009.

I'm also looking to buy more gold on this pullback. I'd be surprised if we break below $1,075-$1,050 on this correction; emerging market central banks will come to market around this price and provide a solid floor in the absence of fabrication demand. Also, gold ETFs are gobbling-up the metal.

Personally, I don't need the stock market and its yo-yo semantics. I don't believe the economy has truly bottomed and certainly don't subscribe to the view that Uncle Sam has indefinitely saved our bacon from financial collapse. This is not an environment whereby I want to take stock market risk.

For 2010, I'm wagering on a return of volatility. And betting on risk is the cheapest it's been since before Lehman Brothers went under 15 months ago.