You ask very apropos questions. Here's the best answer(s) I can muster:

1. The market was wildly over-sold. The number of stocks in the SP-500 above their 50-day SMA was near zero. That's a selloff of incredible breadth. The speed and depth of the decline cannot be sustained forever. Just as bull markets don't go up in a straight line, bear markets can't go down forever in a straight line.

2. You mention '29 being a loss of 90%. Let us understand something - the part of the crash that happened in '29 was about what we have seen so far this past year - about 40%.

The infamous "Crash of '29" took the market down until the end of the year, and in 1930, from the first week of January until about the second week of April, 1930, the market came up 50% off its lows. And then it started down again... hang on... I'll generate a chart in Yahoo's chart:

DJIA from 1/1/1928 to 1/1/1937 

Edit: Darned Yahoo charts. You'll have to enter the dates in the little boxes at the lower-right of the chart to get it to print correctly for the date range. The rest of the variables appear to be set OK.

OK, that's a weekly chart. Let's have a look at where the crash started and what happened. If you put your cursor into the chart area, you can "walk" the data along the chart.

From the peak in August (380) until the first low on November 11 (245), the market dropped about 42%, yes? Then it re-gained about 50% of those losses from the week before Thanksgiving until April 14, 1930.

Just as we're seeing now - a counter-trend rally. But there is no mistaking the larger trend on that chart. The 90% fall you speak of took until July 1932 to be realized.

3. We are not seeing anything significantly different than 1929 with this counter-trend rally, in my opinion. I certainly could be wrong - I'd like to be wrong. But let's think about what is yet to come:

- the Option-ARM loans are going to start defaulting in earnest this year. That's a whole lot more RMBS paper (fewer loans, but higher loan amounts) ready to gut yet more balance sheets.

- there is nothing I see on the horizon that gets consumers spending again. I see no bail-out plan, no increase in job creation, no increase in wages, no relaxation of lending standards - nothing that puts more money for the consumers to spend. I see that the new administration's "stimulus plan" includes a lot of tax breaks, but I don't think that the consumers will be using that money to spend. The numbers simply are not big enough - there is too much debt to be paid down now. If you gave every consumer a big, whoppin' fat check - like $20K -- then you might see them use $10K of that to pay down their credit cards, another $5K to pay off big secured credit, and maybe then they'd feel flush enough to spend some of it. But these chump-change refunds that amount to hundreds or single-digit thousands of dollars? I see that going to pay down debt ASAP.

- I see trade collapsing rapidly across the globe. This gets me asking a much deeper, reflective question: Everyone says that Smoot-Hawley and the "trade wars" that resulted were the reason why trade collapsed. But now we're not seeing a rush to impose protectionism (yet) - and still we see trade collapsing. So was Smoot-Hawley really the reason, or was the passage of the protectionist agendas merely coincident with a deflationary collapse in demand? This will be a good research topic for some bright master's student at some point.

- The long term average valuations of housing are still not met. The US housing market is still priced (in large aggregate) too richly for the median household income and much more than that still in places like California. Many major metro areas have housing prices that will fall at least 10% more from where we are now before they're in line with the long-term trend of 2.6 to 3.0 times median household income.

- Lending standards continue to get tighter.

- Retail sales are collapsing, which is going to lead to commercial real estate defaults in large numbers.

- I see mining companies laying off and slowing down production at mines.

- One of the larger oilfield companies here in Sheridan just filed BK - Rock Well, Inc.  I see in the papers that even the big guys - NOV, SLB, HAL - are shutting down projects that had only one or two rigs on them, and diverting the rigs to finish up bigger projects with better known profit potentials. In other words, the local oil guys don't see oil demand coming back anytime soon.

4. You say that market prices are "...a reflection of all known facts at any given point...." I don't know if you're citing the Efficient Market Hypothesis directly or not, but I'd say that the EMH has been pretty well disproven by recent events. Look at guys like David Einhorn and Greenlight Capital. They were short on the monolines for years - and yet the stock prices kept going up. Einhorn had the information that led to his short position purely from the 10K's - it was right there in the open. He also saw the yawning liabilities of backing CDO's of RMBS's that the monolines were getting into. He got out into public and talked to other fund managers about these issues. While the information was a) public for all, and b) Einhorn made the information even more public, the stock price refused to go down until the credit issues with RMBS CDO's started blowing holes in their balance sheets. Then the stock prices started cratering - well after all this information was known. The liabilities were there in the open for years before the stock price went down - with no reflection of these liabilities in the price.

Likewise, I can point to guys like Buffett seeing things in public and making a bet that goes against the prevailing thought of the market, and returning outsized gains for his perspective - again, based on public info. 

For these (and many other examples I can list), I don't believe in EMH. Stock prices are a reflection more of psychology at that moment, IMO, than they are a reflection of fundamentals. 

Here's one more example of the market ignoring facts: I remember well the day I sat down at my Sun SS-20 workstation, and noticed the price of CSCO was up near $80 in March of 2000. I whipped out my trusty HP-41CV and calculated a P/E ratio around 160:1 for cisco - an utterly absurd valuation, because the "law of large numbers" in growth rates dictates that you simply cannot grow a company of 25,000+ people at 100% per year. There's just no flippin' way. If we were to use the "GARP" metric (P/E shouldn't be higher than the growth rate - eg, the P/E is 30, then the annual profits should grow at more than 30% y-o-y to make the stock 'cheap' enough to buy), then cisco would have had to double+ in size in one year to justify that valuation. Go from 25,000 employees to 50,000 in one year? I don't think so.

The market knew how big the company was, the market had to know that the growth rate of the earnings was not sustainable. We had warned the street that we thought a bunch of sales had been pushed up from 2000 back into 1999 due to Y2K concerns - we'd made that very public for two quarters. The market listened to our management on the conference call back in July of 1999... but as we got into the end of '99 and the start of '00, it was as if the analysts and investors simply did not want to listen. Wall Street bid up the price to absurd levels - and most everyone inside the company thought it was absurdly priced. We thought it would have been rather richly priced at $40/share.

The price was nothing more or less than a reflection of the mob exuberance at the time, not actual known information.

5. Lastly, I come at trading from the flip side of your perspective: I'm horrible at shorting. I truly suck at executing shorts - I might initiate a short properly, but I'm just not pessimisstic enough to ride the short for the real potential of the trade. I'll put a short onto a stock and bail out when I've got a 10% profit on the play; and watch the thing crush down another 40% off the high, lacking the guts to finish it. I freely admit I'm biased to the long side, perhaps too optimistic in my perspective. When it comes to laying on a short, I lack the courage of my analysis.

This last six months is the first time I'm being successful in shorting. I'm still not riding the moves for all they're worth, but I now see no reason to be optimistic at all. I'm merely waiting for this counter-trend move to finish and then I'm going to go short again - not because I look forward to it, but because I'm now resigned to it as being utterly inevitable. I find it interesting that a short-side guy like yourself is optimistic and a long-bias guy like me is pessimistic. I don't know what this means, but I'd say it at least reflects the extraordinary circumstances in which we now find ourselves.