Zbigniew Piekarski explains how and why the bull run is about to end.

"If stupidity got us into this mess, then why can't it get us out?"

- Will Rogers

Bear market rallies are wondrous to behold. They start with a few insiders buying their own stock and catching the shorts out. The shorts close their positions and buy back the shares, propelling the price upwards. The market jumps. It does not walk or stride but jumps upwards, leaving gaping holes between the close of one day and the open of the next.

The old hands are soon on board, being selective at first and taking profits as the market moves higher. Their profit-taking can be seen as the market "correcting" before the hop, skip and jump upwards. As the market progresses higher, it brings forth optimism in those who are invested and hope in those who are about to get on board.

Now the more volatile stocks take the lead. Still large, still liquid, they power ahead. Optimism increases, confidence is restored. Soon rotation between sectors gives way to a broad advance on all fronts as indiscriminate buying takes over. This indicates that the youngsters are on board, flinging other people's money in every direction. Extreme levels of optimism prevail.

By now the market rally is hyped up by the media. Soon the old mantra starts to spread. Stocks are going up. Recovery is on the way. Better times are ahead. When fear is absent and most analysts are bullish, you know that the market advance is about to wane.

The institutional managers who were left behind now have to show that they were holding the stocks that have led the rally. They start buying. The main market starts to consolidate in a ponderous way.

Once the least liquid and least profitable stocks take the lead and start to be publicized as sources for double digit returns, you know that the party is over and that the kamikaze brigade has returned to the fray. Insiders start to sell and the "smart money" begins to leave. Individual shares make a new high and then end lower by the end of the week. Those are "buying climaxes," and are a sure sign of "distribution" as opposed to "accumulation." Now is the time to prepare to short.

At the current stage optimism is at its most strident. Nothing can stop the advance. Wind, fire, water, major power failures and record levels of debt do little to deter the belief that we shall achieve levels of prosperity that we have only dreamt of. Yet the gaps that were left as the market jumped upwards wait to be filled. That is the law of the market. Why do you think that the words "mind the gap" echo in the underground stations around the City of London, particularly Bank station on the Central Line? That announcement is there to remind the youngsters of one of the cardinal rules of market forces.

Enjoy the euphoria, for it will remain a dim and distant memory for generations to come as, initially, the gaps of 325/330 in the Techwig, 12893/13020 on the WIG and 1061/1074 in the WIG20 are filled.

I say initially as I do have a pessimistic view of what lies ahead. The ingrained inertia of custom and tradition are beginning to triumph over market forces.

I live in the center of Warsaw. The two nearest supermarkets are Sezam and Albert. I stopped shopping in Sezam because they effect sporadic stock-taking during working hours, run out of popular items, and have a fresh bread oven in the corner that hasn't been used for more than nine months. Now Albert has caught the habit. They have run out of the most popular AA batteries. This was not a one-off occurrence. The batteries have been missing for a month. On the micro level, we have returned to the "Polish norm." Now let us examine the macro level.

Most external investments into Poland have, at their core, the belief that Poland will effect a successful and smooth accession to the EU, and that the government has sufficient competence and financial discipline to effect and implement the policies and regulations required by the EU. The government signed legal and binding documents testifying to this fact.

Government debt has been purchased by foreigners in the belief that the money would be used responsibly and would add to the general wealth of the economy. The recent flight from Treasuries was the result of investors becoming more "risk aware," as the words of Federal Reserve Chairman Alan Greenspan did not support the bond "bubble" that existed in the United States. In addition, the United States has to raise huge amounts of money at interest rates that have suddenly increased, and are on par with those provided by Poland once you take the risk element into consideration.

Now imagine the reaction of the foreign investor when it becomes evident that our government is not only incompetent, but also untrustworthy. Imagine the panic withdrawal of capital from both the Treasuries and the Warsaw Stock Exchange when the world learns that Poland has not implemented procedures to which she had agreed, and has mishandled and misappropriated the initial funds that were given to her by Brussels.

In addition, imagine the effects of the social unrest that will undoubtedly occur once the food industry realizes that export markets are closed to it because producers have not adhered to mandatory hygiene regulations, and when the farmers realize that they will not receive a bean in the spring.

The credibility gap that this news will illustrate will adversely affect the present and the future of this country, and will be publicly revealed in November by the EU Court of Auditors. Until then, the country will continue to dance on hot coals in bare feet.

On the WSE: The expression "jumping through hoops" comes to mind. Hoop's directors see the company's shares 100 percent higher. Why stop at 100 percent? Why not 200 percent or 500 percent or, dare I say it, 2,000 percent? After all, here is a creation that will soon rival Pepsi and Coke and become the largest purveyor of soft drinks throughout eastern Europe. Hold on to your dreams ... but just don't taste the product.