Prudent investing is aligning your investment positions with reality. That means being bullish in bull markets and bearish in bear markets and correctly identifying the trend any stocks you may own are currently in and be willing to accept the fact that one day their trend will likely change and that is when you will want to take your profits - or cut your losses if you don't have any.
That is what success in the stock market is really about.

When a market is in decline most people don't take action. They fail to recognize that the trend has changed on them or stubbornly think they are going to fight the market and just hold on in the face of losses, because they believe their positions will go up - because they have to.

The next thing you know their positions fall more and more and eventually they simply cannot take the losses anymore and sellout. They then admit the reality of the downtrend their stocks have been in and start to say that it is a bear market. The masses tend to do this together and that is why at real market bottoms almost everyone is bearish - but on the way down as they try to stay tough they convince themselves that the market is still bullish.

We saw this pattern play out to a tee back in May as the market topped out and fell for two months while the put/call ratios and VIX stayed subdued until the very end. People kept calling bottoms and holding on until Fannie Mae and Freddie Mac started to unwind. It was only then and over 200 points lower on the S&P 500 that fear came into the market - the type of fear that can put in a low and cause a rally.

And that market has rallied since that July low. But I am now worried now that the rally is near its end - if it has not ended already. And I know that hardly anyone is on guard for this. Few have taken profits on this rally. Few have said this is a bear market and I should use the rally to get out. Almost everyone is ignoring the reality of the bear market and the historical fact that the market's worst two months tend to be in September and October.

The market situation right now is very similar to what it was like in December and February. In both of those times the market put on a very short-lived bear market rally. During these rallies volume steadily declined just like it has right now. In fact last week was the lightest volume week of the year for the stock market. Both rallies ended with a lower high put in place. Last week the market rallied in the beginning of the week, but failed to break through it earlier August highs and turned down hard on Friday and Tuesday on higher volume.

If it breaks its August lows then a confirmed double top will be put in place and you can expect to see substantially lower prices to follow. Right now you want to watch the 1260 level on the S&P 500. If the S&P 500 closes below this level then I'll take it as confirmation that the rally is over.

One thing worth noting is that the average bear market rally lasts 6-8 weeks. Last week marked week seven of the rally that began in July.

There are a lot of things to worry about now. For starters Fannie and Freddie Mac are on the verge of going to zero. According to Barclays Capital the two companies will have to raise $225 billion of short-term to debt over the next six weeks. Of course they won't be able to do that in the private markets with crashing stock prices.

That means that the first government $100 billion plus bailout of Freddie and Fannie is right around the corner. I don't think the stock market or the bond market will take that too kindly, because it will mean the government raising the white flag and announcing to the entire world that it will print any amount of money to bail out these two companies and with estimates for their losses to reach $500 billion to even a trillion that is a lot of money we are talking about. Economists are also estimating another $500 billion to trillion dollars will be spent by the FDIC to cover bank failures. Put the two figures together and you are talking about the government having to add over one trillion dollars to the deficit in the next year as a result of the credit crisis.

That's serious money printing. It means serious trouble for the economy and the stock market and most likely a huge explosion in gold prices once gold gets it footing.

Mike Swanson is Editor, www.wallstreetwindow.com