A year ago I recommended investors adopt a defensive posture in regards to the stock market. Stocks were able to move higher, before chopping sideways and then selling off in this current period of volatility. Significant price swings have become commonplace and stocks have so far in 2015 delivered negative returns. My recommendation to underweight stocks was not based on predicting an imminent bear market. Instead, it was a declaration that the risks versus rewards of owning stocks were too negative to justify even a neutral weighting, and the potential for a bear market too high. For a long time, I had been writing about the risks to this current bull market, but that was the first time I recommended the more conservative, defensive posture that I continue to advocate. The reasons for that call are worth revisiting, particularly my worries about China, as they now seem especially pertinent.
bear market
Stock Market Tug of War
I.C. Angles Investment Post…
So far in 2015, the bulls and bears have been in a tug of war on the direction of the stock market. The first quarter has fluctuated between the S&P 500 posting new record highs and turning in a negative return for the year. Both sides have compelling arguments for stocks heading lower or higher in the near term. The bears argue stocks should head lower, because most measures of economic performance have come in below expectations. The economy rather than taking off, as was widely anticipated, is ebbing closer to stall speed. Obviously a recession would be a huge negative for stocks. On the other hand, the bulls have several reasons for why disappointing economic data should not stand in the way of stocks making new highs.
Technically Troubling
I.C. Angles Investment Post…
Despite worrisome characteristics around this bull market, it was not until October of this year that I recommended long-term investors move to underweight stocks. I had remained reluctantly bullish previously, because from a technical perspective of looking at price and volume behavior, including the 125-day simple moving average, the market was simply too robust to bet against in my opinion. But that has changed, and there are several technical indicators, beyond simple moving indicators, that are now cause for concern. It is said no one rings a bell at a market top. That is true. Nevertheless there do tend to be warnings, often recognized in hindsight. And there are some technical warning bells now ringing that previously were silent. Whether they are prophetic or a false alarm, will only be known with the benefit of time. However, given other risk factors, including the overpriced nature of this market, my advice remains to underweight stocks.
This Isn’t Going to End Well
Part Four: Take the Money and Run
I.C. Angles Investment Post
“You’ve got to know when to hold ‘em. Know when to fold ‘em. Know when to walk away. Know when to run.” — Kenny Rogers, country music singer
“Go on take the money and run.” — The Steve Miller Band, American rock band
Risks around stocks have risen considerably, and even long term investors should now substantially underweight equity exposure. Due to the unique characteristics of this stock market, my best advice is to now treat it as if in the onset of a bear market, regardless of near term price action. At this point in 2014 many warning signs are flashing red—the bond market is signaling weakening growth and greater risk of default, while stock market breadth has deteriorated with many stocks, including small cap and foreign indices, exhibiting extended weakness, while fewer, very large stocks were supporting the market until the recent sell off. The risk versus reward of stock exposure has become too high for an even normal stock allocation, let alone the aggressive allocation most currently posses. It’s time to under weight stocks by taking money out of the market or hedging equity exposure with relation to key technical levels.
This Isn’t Going to End Well
Part Three: Malignant Growth
I.C. Angles Investment Post
The stock market is enjoying one of the strongest bull markets in its history, but the story is the opposite for the economy, where this recovery represents one of the weakest in U.S. history. And that spells bad news for investors. High-flying stock market valuations and corporate profits reverting back to more normal ranges, as covered in Part One and Part Two of “This Isn’t Going to End Well” aren’t the only reason for investors to fear an especially painful stock market decline. The particularly malignant and unsustainable nature of much of this cycle’s growth is another powerful reason to prepare for a big decline in stocks.
A Scarier Looking Market
I.C. Angles Investment Post…
Unwilling to yet call a bear market, I have nevertheless become increasingly negative on this bull market. But despite a rough January, the stock market, as measured by the S&P 500, remains above its 125-day moving average—a level it has held for over a year. As such it would still be premature to call the current bull market over. But it’s not too early to examine why a meaningful move down with a breach of important technical levels, such as the 125-day, will be a reason to adopt a defensive posture, rather than “buy the dip” as so many are already advocating. In the spirit of my first “A Scary Looking Market” post I’ve included some new charts that argue against many of the currently popular bullish arguments. There is good reason to believe that optimism for the ability of the Federal Reserve through monetary policy to engineer strong economic growth is misplaced. Also unlikely to be realized is the hope that stock price multiples will grow further in a Great Rotation of investors moving from cash and bonds into stocks.
Fear of Heights
I.C. Angles Investment Post…
As the stock market makes new highs, there are many reasons to worry that the fall could be particularly hard when it comes. I’m no permabear and have not been constantly arguing a bear market is around the corner. Even if I haven’t been the biggest cheerleader of stocks I have been an advocate. For example in August of 2011 I wrote about how, despite negatives, stocks were the best investment options available to most and in my February post this year I argued that despite rising risks investors should continue to hold stocks and a decline was unlikely to transpire until 2014. At the same time, starting in May of this year, as the stock market kept making new highs, I began to argue that risks in 2013 were rising and investors should use the strength to raise cash levels and sell some stocks, particularly money involving a low risk threshold and time horizon. As I look at where the stock market stands at the end of the year, I continue to believe the risks of a bear market being sooner rather than later have only grown.
Exit Signs
I.C. Angles Investment Post…
Investors are pouring money into the stock market. As the market makes new highs, they’re on track to allocate the most money into stocks since 2000, right before that market rolled into a bear market. The so-called dumb money is often late to the party, as most investors buy at highs and sell at lows. Dumb money rushing into stocks is just one more bearish sign in this almost five-year old stock market. But as many short sellers have found, as this market keeps making new highs, famous economist John Maynard Keynes was right when he proclaimed the market can stay irrational longer than you can stay solvent. Bears actively betting against this market are getting killed. No matter how negative the fundamentals, betting against a trend is a good way to go broke. So, now might be a good time to consider what signs will indicate the current bullish trend has reversed, and the time has arrived to head for the exits.
A Scary Looking Market
I.C. Angles Investment Post…
This bull market increasingly looks scary. Setting new record highs and extending deep into 2013 only makes it look more worrisome. It was only a little more than a year ago I recommended investors keep stocks as the largest portion of any long-term investment portfolio. But that advice came with the caveat that market risk would rise in 2013, and indeed I have become increasingly nervous about stocks this year. Although I have yet to declare a market top, and will not call a bear market until important technical levels are broken, I have not hesitated urging taking profits and raising cash levels by selling stocks as this market has set new record highs this year. Pictures can often convey more than words, and in this post I am going to highlight a few notable and scary charts related to the current stock market.
It’s Not Different this Time
I.C. Angles Investment Post…
To believe that the stock market will rise significantly from its recent August highs, when the S&P 500 reached over 1,700 points or not revisit near its lows, is to bet that it is different this time. The famous declaration of legendary investor, Sir John Templeton, that, “The four most dangerous words in investing are, it’s different this time” has over the past few months become particularly pertinent. The secular bear market that began in 2000 (when investors believed it was different that time and the Internet had fundamentally changed the nature of the stock market removing the risk of a major bear market) would need to have ended in the 2009 bottom for the stock market to now rise significantly higher or not fall to around previous lows. But there is little reason to believe this time is different, that stocks entered a new secular bull market in 2009, well below the typical duration of a secular bear market and that the odds now favor a heavy allocation to stocks.
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