While most investors have been on the losing end of the market's ride down in the past month, Richard Bove could have limited their losses.

Bove, who covers banks and brokerage firms for investment boutique Punk Ziegel, issued a downgrade of all his stocks on July 18, the day before the Dow and the S&P 500 reached their highest points so far this year.

He urged the firm's clients to sell their shares of Bear Stearns, Goldman Sachs, Lehman Bros., Merrill Lynch and Morgan Stanley. And he downgraded the nation's big three banks — Citigroup, Bank of America and JPMorgan Chase — from "buy" to "market perform."

Analysts almost never use the s-word, even in this era in which investment banking relationships are not supposed to affect an analyst's judgment. So Bove's call was a gutsy one, and profitable for anyone who acted on it: Since he issued his sell recommendation, shares of the five investment banks have dropped 20 percent on average.

Bove says his call was the result of several months of research into the proliferation of mortgage-backed securities and related products. While these products fueled profits for banks and brokerage firms, Bove says the size and scope of the new debt instruments concerned him.

He noted that U.S. economic growth was only 1.8 percent in real terms over the past year — not enough to generate the income required to pay the interest on all these debt instruments.

"The first sign of this is that poor people cannot pay their mortgages," Bove wrote last month. "The next step will be rich corporations not being able to pay for the leveraged debt that they have created."

Bove concluded that banks holding these kinds of loans on their balance sheets were placing an unrealistically high value on them. But that was just supposition until two Bear Stearns hedge funds began to implode in June. The Bear Stearns funds — heavily invested in securities backed by subprime mortgages — were losing their value because of high default rates.

"It was a clear indication that assets in the U.S. were overstated," Bove says. "... It was time to cut and run."

Bove, 66, now predicts a bearish market correction of 20 percent to 25 percent lasting about six months.