Tuesday, December 31, 2013
Sunday, December 29, 2013
BEAR MARKET BOTTOMS: ONCE-IN-A-LIFETIME OPPORTUNITIES
Last week I wrote an article on why I think the bull market in stocks is coming to an end. As usual the retail public is chasing a move that is extremely mature and ripe to reverse, while assuming that the current trend will continue. Amateurs always make this mistake at tops ... and bottoms. Their emotions tell them the move will continue indefinitely. It never does.
As you can see in this next chart, dumb money traders are becoming more and more confident the further this parabolic move progresses. Professional traders, on the other hand, get more and more nervous as the market stretches further and further above the mean.
Source: sentimentrader.com
I can assure you we are not done with the secular bear market in stocks that began in 2000. All the Fed has managed to do is blow another bubble in the stock market. And this bubble has again reached levels of overvaluation that will eventually collapse the market just as was the outcome in 2007.
The following chart illustrates that the stock market's P/E ratio is again at a historically extended level. The current reading of 26.30 is at a level where most bull markets top. Also, notice the extreme overvaluation in 2000 (P/E ratio of 45). This overvaluation was not corrected by one brief move back to the historical mean P/E ratio of 15; an overvaluation as extreme as what culminated in 2000 requires a corrective move that is equally extreme in the downward direction. An overvaluation as extreme as what occurred in 2000 is going to require a move just as extreme in the opposite direction before we finally clear this market of the excesses that were created during the tech bubble, and exacerbated by the real estate bubble.
I don't expect this secular bear market will be finished until we reach P/E ratios similar to 1932.
On the other hand, while retail traders are chasing the bubble, professional traders are looking for real opportunities. I think I can say without any hesitation, real opportunity is not going to be found in the stock market after a five year bull run.
Opportunities are found at bear market bottoms. For those emotionally capable of going against the herd, buying a bear market bottom is where the really big money is made.
As a matter of fact if one can pick a bear market bottom the initial surge will often gain 40%-100% in the first few months. These kind of gains certainly make it worth the frustration and whipsaws that are almost always incurred trying to pick a final bottom. The following three charts of the S&P 500 (1982, 2003 and 2009) illustrate this point.
Not surprisingly the more severe the bear, the more violent the rally is once the final bottom has formed, and the bigger the bull market that follows.
Here are two examples of extreme bear markets, and the initial rallies off of those final bottoms (HUI - Gold Bugs Index 2000 and 2008).
Now let me show you one of the most extreme bear markets of the last 30 years (GDXJ - Junior Gold Miners Index ETF).
While retail investors are blindly plowing money into an overvalued, overextended, overbought and parabolic stock market, professional traders are quietly accumulating massive positions in preparation for the end of one of the most severe bear markets in decades.
Once we have confirmation that the final bottom has been printed, I'm expecting at the very least an initial surge over the first 3-4 months to test the 2012 resistance zone. That would be a move of almost 100% (see HUI chart below).
I'll say it again; picking bear market bottoms isn't easy. Very few people have the patience, conviction and endurance that it takes to survive the volatility of a bear market bottom. Especially when everyone else they know is making money buying into the latest bubble. But human nature never changes, and those people always get caught when the bubble pops. Tech investors, real estate investors, and possibly Bit Coin investors come to mind.
In contrast, the few traders that can hold on and survive a bear market bottom become the millionaires and billionaires of tomorrow.
As you can see in this next chart, dumb money traders are becoming more and more confident the further this parabolic move progresses. Professional traders, on the other hand, get more and more nervous as the market stretches further and further above the mean.
Source: sentimentrader.com
I can assure you we are not done with the secular bear market in stocks that began in 2000. All the Fed has managed to do is blow another bubble in the stock market. And this bubble has again reached levels of overvaluation that will eventually collapse the market just as was the outcome in 2007.
The following chart illustrates that the stock market's P/E ratio is again at a historically extended level. The current reading of 26.30 is at a level where most bull markets top. Also, notice the extreme overvaluation in 2000 (P/E ratio of 45). This overvaluation was not corrected by one brief move back to the historical mean P/E ratio of 15; an overvaluation as extreme as what culminated in 2000 requires a corrective move that is equally extreme in the downward direction. An overvaluation as extreme as what occurred in 2000 is going to require a move just as extreme in the opposite direction before we finally clear this market of the excesses that were created during the tech bubble, and exacerbated by the real estate bubble.
I don't expect this secular bear market will be finished until we reach P/E ratios similar to 1932.
On the other hand, while retail traders are chasing the bubble, professional traders are looking for real opportunities. I think I can say without any hesitation, real opportunity is not going to be found in the stock market after a five year bull run.
Opportunities are found at bear market bottoms. For those emotionally capable of going against the herd, buying a bear market bottom is where the really big money is made.
As a matter of fact if one can pick a bear market bottom the initial surge will often gain 40%-100% in the first few months. These kind of gains certainly make it worth the frustration and whipsaws that are almost always incurred trying to pick a final bottom. The following three charts of the S&P 500 (1982, 2003 and 2009) illustrate this point.
Not surprisingly the more severe the bear, the more violent the rally is once the final bottom has formed, and the bigger the bull market that follows.
Here are two examples of extreme bear markets, and the initial rallies off of those final bottoms (HUI - Gold Bugs Index 2000 and 2008).
Now let me show you one of the most extreme bear markets of the last 30 years (GDXJ - Junior Gold Miners Index ETF).
While retail investors are blindly plowing money into an overvalued, overextended, overbought and parabolic stock market, professional traders are quietly accumulating massive positions in preparation for the end of one of the most severe bear markets in decades.
Once we have confirmation that the final bottom has been printed, I'm expecting at the very least an initial surge over the first 3-4 months to test the 2012 resistance zone. That would be a move of almost 100% (see HUI chart below).
I'll say it again; picking bear market bottoms isn't easy. Very few people have the patience, conviction and endurance that it takes to survive the volatility of a bear market bottom. Especially when everyone else they know is making money buying into the latest bubble. But human nature never changes, and those people always get caught when the bubble pops. Tech investors, real estate investors, and possibly Bit Coin investors come to mind.
In contrast, the few traders that can hold on and survive a bear market bottom become the millionaires and billionaires of tomorrow.
Friday, December 27, 2013
Thursday, December 26, 2013
Wednesday, December 25, 2013
ANOTHER BUBBLE LOOKING FOR A PIN
Well the Fed in its infinite wisdom has gone and done it again. They've created another bubble. And this bubble is arguably the 6th in the last 13 years (tech, real estate, credit, bond, oil, and now stocks - again). And let's footnote the Fed's creation of the present echo bubble in housing, for good measure.
If one steps back far enough they can see what's really happening. The Fed has now manufactured a parabolic move in the stock market. This parabola is much more aggressive (and thus even more unsustainable) than witnessed at either the 2000 or 2007 stock market tops.
Now here is the problem - parabolas always collapse. There are never any exceptions. When the pin finds this bubble it's going to take down not only our stock market, but unleash a destructive force on the global economy.
At some point profit taking starts as nervous professionals fearing a regression to the mean event start to lock in profits. As the big institutional money starts to come out of the market the selling begins to accelerate and the losses quickly mount.
The steeper the parabola the quicker the losses once the parabola breaks. It's not unusual to see 3-6 months of gains evaporate in the space of days when one of these structures collapses. I have a pretty good idea the level to which this market will fall initially, once the break begins; more on that in a minute.
The path creating this unsustainable market behavior began in 2011. If the Fed had just allowed the market to correct naturally and drop down into its 4 year cycle low in 2012 we would probably now be on a sustainable path into another secular bull market.
Unfortunately the Fed made a catastrophic mistake. Instead of allowing the market to function naturally they began operation Twist, then LTRO, then QE3 and QE4. The result as you can see in the first chart is they've created a huge unsustainable parabolic move in the stock market. Try as they have to prevent corrections, the longer they allow this to continue the more devastating the crash is going to be when the market breaks.
Based on the extremely stretched nature of the current intermediate cycle (week 27) I'm looking for a top and the start of the collapse early next year. Possibly as we begin earnings season. If one is in the market trying to catch the last few percent of this upside price movement, please understand we are not in an investor environment this late in the bull market. This is short term trading only and at the first sign the crash has begun, get out and stay out.
Margin debt and money market funds are at levels indicating retail investors are now all in like they always are at market tops.
I expect we are going to see the market fall precipitously to test the previous bull market tops and erase most of last year's gains in a matter of days or weeks. At that point Yellen will panic and all thoughts of tapering will vanish. As a matter of fact I expect the Fed will increase QE, maybe drastically, to try and reflate the parabola.
But the Fed's likely attempt to reflate and sustain the stock market will be futile, as the damage will already have been done. All they will accomplish is a violent echo rally common to all collapsing parabolas. From there the bear market will have begun and the more QE the Fed throws at the market, the more and faster the liquidity will leak into the commodity markets until inflation completely destroys the economy and the next recession gets underway.
The Fed thinks they are creating a "wealth effect". All they've really done is sow the seeds of the next crash.
If one steps back far enough they can see what's really happening. The Fed has now manufactured a parabolic move in the stock market. This parabola is much more aggressive (and thus even more unsustainable) than witnessed at either the 2000 or 2007 stock market tops.
Now here is the problem - parabolas always collapse. There are never any exceptions. When the pin finds this bubble it's going to take down not only our stock market, but unleash a destructive force on the global economy.
At some point profit taking starts as nervous professionals fearing a regression to the mean event start to lock in profits. As the big institutional money starts to come out of the market the selling begins to accelerate and the losses quickly mount.
The steeper the parabola the quicker the losses once the parabola breaks. It's not unusual to see 3-6 months of gains evaporate in the space of days when one of these structures collapses. I have a pretty good idea the level to which this market will fall initially, once the break begins; more on that in a minute.
The path creating this unsustainable market behavior began in 2011. If the Fed had just allowed the market to correct naturally and drop down into its 4 year cycle low in 2012 we would probably now be on a sustainable path into another secular bull market.
Unfortunately the Fed made a catastrophic mistake. Instead of allowing the market to function naturally they began operation Twist, then LTRO, then QE3 and QE4. The result as you can see in the first chart is they've created a huge unsustainable parabolic move in the stock market. Try as they have to prevent corrections, the longer they allow this to continue the more devastating the crash is going to be when the market breaks.
Based on the extremely stretched nature of the current intermediate cycle (week 27) I'm looking for a top and the start of the collapse early next year. Possibly as we begin earnings season. If one is in the market trying to catch the last few percent of this upside price movement, please understand we are not in an investor environment this late in the bull market. This is short term trading only and at the first sign the crash has begun, get out and stay out.
Margin debt and money market funds are at levels indicating retail investors are now all in like they always are at market tops.
Source: sentimentrader.com
I expect we are going to see the market fall precipitously to test the previous bull market tops and erase most of last year's gains in a matter of days or weeks. At that point Yellen will panic and all thoughts of tapering will vanish. As a matter of fact I expect the Fed will increase QE, maybe drastically, to try and reflate the parabola.
But the Fed's likely attempt to reflate and sustain the stock market will be futile, as the damage will already have been done. All they will accomplish is a violent echo rally common to all collapsing parabolas. From there the bear market will have begun and the more QE the Fed throws at the market, the more and faster the liquidity will leak into the commodity markets until inflation completely destroys the economy and the next recession gets underway.
The Fed thinks they are creating a "wealth effect". All they've really done is sow the seeds of the next crash.
Tuesday, December 24, 2013
Monday, December 23, 2013
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