The question on everybody's mind for 2015 is when will the stock market start
to correct in value and will it turn into a 50+% collapse?
Over the last 15 years investors has been through a lot in terms of market
volatility. From the 2000 tech bubble bear market and the 2008 financial crisis
bear market investors are far from having their investment psyche scars healing
and is for good reason. Many sustained 50+% loss in their portfolio value more
than once and are not willing to do it for a third time.
A large group of investors exited the stock market and has never returned.
Unfortunately those who exited have missed the seven-year bull market rally
to all-time highs. Those who remain in the market are in constant fear that
a new bear market will emerge.
The stock market has a tendency to move in a 6 to 8 years cycle. With the
current bull market now lasting seven years and was several indicators signaling
weakness within the equities market it makes logic sense that a bear market
is about to emerge.
The stock market cycle and technical indicators are not the only causes the
trigger a bear market. A rising Fed funds rate can cause weakness in the equities
market and if you know what to look for you can escape the next bear market
and profit from falling prices.
Question: if you could put your money in a guaranteed investment not to lose
any principle and receive a 1% per annum return on investment or receive potentially
7% per year but with no guarantee on your principle, which would you choose?
Most people would choose the 7% return option because they understand financial
rewards almost always require some risk. Over the last 90 years the stock market
has on average returned 7% annualized gains.
Obviously not all years will have a positive gain, but when averaged over
many years, it is reasonable to expect an annual return of 7% from the stock
market.
What if I told you there is a way to improve on this? For example, if you
simply moved your equity investments to a large cash position at the start
of each bear market?
The chart below showing the gain from your would have has from 1995 to 2015
by selling all stock holdings when the US stock market topped during 2000 and
2007 avoiding the last two bear markets.
100% cash position during bear markets would have generated 635% ROI,
which is a 31% average annual return. The numbers are staggering to say the
least. But obviously you cannot pick the exact top and bottom, but even if
your timing was way off and you only pocketed half of those gains you would
still be way ahead of game.
You may be asking yourself: How do I avoid a bear market?
I believe for investors this is not that difficult because a major trend change
takes time and because the moves are so large you don't need to be perfect
with your timing.
Take a look at my analysis charts below. The first one shows the 10 year treasury
price which is broken its short term resistance levels and is rocketing higher.
We have seen this happen 6-12 months before the last two bear markets started.
Let's take a look at the Fed rates. Not every rate rise turned into a recession,
but nearly everyone has. Rising rates will lead to a market downturn.
Could the next bear market/recession occur when rates start to climb? After
analyzing economic data provided by Brad Matheny I have a max rate at 2% over
the next couple years.
That combination of technical indicators, analysis above couple with the rising
fed rate hikes had created the perfect storm for a bear market to emerge which
I expect to last 1-2 years.
Bottom line, we are still in a bull market but only months away from a bear
market. Do not ignore these warning signals.
Keep your eye on the 2 year treasury rates instead because they usually lead
Fed funds, and will provide an earlier warning signal as to the markets down
turn.
When rates start to rise, we may only be weeks, instead of months, before
the stock market starts to collapse.
