bear market

A Bearish Stock Market Prediction that is Unfolding

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.

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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.

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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.

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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.

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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.

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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.

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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.

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