There are many reasons to expect the current cyclical bull market in stocks to give way to the next vicious bear. Let me give you my top six.
First of all …
The Market Is
Way Overvalued
As I’ve written before, all traditional fundamental valuation measures like price/earnings ratios, dividend yields and Tobin’s Q ratio unambiguously come to this conclusion.
Then last week Jeremy Grantham, the famous value investor, published a missive stating that according to his methodology the S&P 500 is 45 percent overvalued. He calculates fair value at 920.
I want to add that secular bear markets — like the one that started in 2000 — do not end at fair value but in clearly undervalued territory. Hence risks are very high.
Second …
Sentiment Indicators Are about as
Lopsided as They Can Get!
Investors Intelligence Advisors Sentiment showed more than three bulls for every bear during four of the past six weeks, a very unusual stretch of bullish sentiment.
Plus, the Investment Company Institute’s latest figures show that the cash level of investment funds hit a record low 3.4 percent in March. Never before have fund managers been more heavily invested in stocks than now — not during the high of the stock market bubble in 1999/2000 and not at the top in 2007.
Third …
This Cyclical Bull Market Is
Statistically Running Out of Time
Cyclical bull markets in times of secular bear markets have historically lasted a little more than two years. The current cycle low dates back to March 2009, which gives this bull market an age of nearly 27 months.
In and of itself the duration of a bull market is of little meaning. But coupled with severe overvaluation and irrational exuberance the mature age of this bull adds an additional argument to become very cautious.
Fourth …
QE2 Will Soon Be History
Nine months ago the economy and the stock market looked ready for a double dip. Then Ben Bernanke entered the scene and announced QE2.
His goal of lowering long-term interest rates in this monetary campaign was a flop. The economy regained some strength though — probably due to the accompanying tax cuts. Consequently the stock market experienced an impressive wave of speculation lifting the S&P 500 12 percent above the April 2010 high.
The well-announced end of QE2 is quickly approaching. Come the end of June the Fed will be done. For the time being QE3 seems to be out of the question, depriving the market of important support.
Fifth …
Commodities and the Dollar Have
Just Experienced Strong Reversals
The silver market has made a deep reversal. From its high of around $50, it dove all the way down to $33. That’s a 35 percent haircut in a mere six trading days.
Other commodities have also gone through major trend reversals, namely crude oil, copper, and lumber. All three are leading economic indicators. Therefore these reversals may well contain a bearish message for the economy.
An important trend change has also developed in the dollar.
During the last few years the dollar has shown an interesting pattern compared with other financial markets …
A weak dollar was accompanied by rising risk assets like stocks, commodities, and junk bonds. And a strong dollar coincided with falling risk assets. This correlation still seems to be working with commodities down and the stock market in a corrective mode.
Already the euro has fallen a hefty 8 cents from its 1.50 high in just a few days. If this trend reversal of the dollar is for real — and I think it is — then the stock market is likely on the verge of a negative surprise.
Sixth …
Emerging Markets
Are Looking Weak
On a global basis the S&P 500 is somewhat of an outlier right now, since it managed to make a new cyclical high at the end of April.
Most international stock markets did not have the strength to follow this lead, including: Australia, Brazil, France, Hong Kong, India, UK, Mexico, Russia, China, Switzerland, and Japan.
As you can see in the chart below, the BRIC countries are exhibiting weakness compared to the S&P 500. Their index is looking very ominous, like a huge topping formation in the latter stages.
Data Source: Bloomberg
Most emerging market central banks have begun to tighten their monetary policies. Last week China raised reserve requirements for the fifth time this year. Tighter monetary policy almost always leads to a marked economic slowdown — if not to a full blown recession.
Emerging stock markets tend to lead the U.S. market. They were the first to hit bottom during the last bear market. And now they may again be leading the way into the next bear market.
Therefore this could be a good time to consider an inverse emerging markets ETF, like ProShares Short MSCI Emerging Markets ETF (symbol EUM). If you buy it at current levels between $30-$31, I suggest putting a stop loss at just below $30.
Best wishes,
Claus
{ 17 comments }
Claus,
Long term you are correct but for now your conclusions seem incorrect to me. The reason why I disagree with your basic premise is as follows:
The EURO is in a very weakened condition and this situation can continue for months. A weak EURO strengthens both the dollar and dollar denominated assets. These effects are clearly visible at this time.
It is therefore my conclusion that both the dollar and dollar denominated assets, such as stocks and bonds will continue to increase in relative value until there is a clear dollar shock (QE3 or debt ceiling increase without spending cuts). At that point your prediction of a severe market correction will come to pass.
Can someone like George Soros, who had $800 Million invested in Gold, but now pulled out, can he manipulate the prices of ETF’s that are designed to run counter to gold? It seems to me with the ETF instruments, it is a lot easier for those with HUGE pockets to manipulate prices for their own gain. I feel it is very risky to have instruments designed to PROFIT when something else declines. Too many “insiders” have enough money to swing things with their money moves.
I like your articles, for the most part, but really hate your pushing of ETF’s. For the average investor like me, the game is too complex for me to “play”.
Anyone with a lot of money that starts buying or selling will effect that market. It’s just the law of supply and demand. Now if they can manipulate the market, maybe to some extent but its a double edged sword.
Yeah, I bit on the inverse treasury ETF touted a few months ago. After watching my basis lose about 3% week after week, I took my losses and got out to stop the bleeding, and my stress level. I just am not wired to “play” the inverse game.
You’ve been predicting a market top for the past year but the market just keeps going up. Commodities are undergoing a short term correction in a longer term bull market. Unless China and India go out of business tomorrow it is unlikely we will see a bear market anytime soon. With corporations continuing to turn in record profits the market should continue higher.
The Dollar could crash at any time.Holding Dollars is riskier than real assets,in my opinion.You could be correct in the short term.Who can predict the short term?Longer term,the Dollar will continue to decline(a monster trend that has the Dollar down over 98% against real money,gold,since 1913) and that means all things priced in Dollars will appreciate.The Dow is up from about 850 in 1982 and,I suspect,much of that gain is due to the Dollar declining.
Klaus,
I remember the many times that you ended your articles with the admonition “Buy gold and silver!” Was that sage advice? Many who heeded that urging would probably not say yes right now. You and many other Weiss analysts urged everyone into commodities as advisable contra-dollar investments. Now those who heeded that advise might be crying in their bee, suffering huge losses.
Sure, some will say that in the long run commodities will turn up as will gold and silver, yet you throw a wet towel on their heads with your current predictions of a huge drop in the market. And, as we have seen, the commodities and silver have taken the biggest hits.
So many Weiss analysts urged us to buy buy buy emerging market stocks as our great hope to survive the dollar decline. Yet now, Klaus, you show us that the emerging markets are no stronger—-yea, are probably weaker—than the U.S. markets!
Bottom line: If you love gambling then play the markets. The casino owners have stacked the deck in their favor. They are not in business to lose, but to take your money.
ABE
I follow many different market analysts, and one thing stands out clearly: None of them are usually right, and their prognostications are no more valid than those of any common person viewing the same set of facts.
All the analysts have to lead their following herds one way and then the next, claiming they are making them phenomenal profits. This is so much smoke in the wind. The analysts are pawns of the big hedge funds and the elite insiders. They sway the public to the advantage of the big players, who then take the winnings off the table while the little guys slink home with empty pockets.
I wonder what happened to the subscribers to Sean Brodrick’s Red Hot newsletter? Are they very happy that they bought silver miners now and that they paid Mr. Brodrick serious money to lead them in that direction—off a cliff! Many small investors who bought into the hype simply cannot afford such a downturn. Larry Edelson is predicting quite a long down period for this metal before he believes it “might” turn up again. Notice how they always call both sides of the coin–heads and tails. That way, months later, they can vaunt themselves by claiming, WE WARNED YOU OF THIS MONTHS AGO.
Anyone could do that if they made sure to call both sides. You can claim you were right either way. And, many clueless followers are none the wiser.
Did your own gut tell you differently on any of the moves you made because of urgings from Weiss (or any other company’s) analysts? They all said jump in with both feet into silver and commodities and emerging markets. Now Klaus is saying the ceiling is about to fall in on us.
Can you afford to put your life savings on the line in this “rigged casino” for the next 2 years?
The game is rigged. Of that, you can be sure. The insiders will be the ultimate winners. Of that, you can be sure. The ultimate losers will be the common investors. Of that you can be sure.
Act accordingly.
AMEN.When it comes to my money,I do my own research.There is nothing wrong with getting different opinions,but,you have to educate yourself on markets,after all,it’s your money.GS,BAC,JPM and huge hedgefunds manipulate markets,that is why you follow the money,watch the volume.Big money always gets in early ,so,follow the money.Soros got out because, EVERYONE IS PUSHING METALS,that signals at top to many people,your in the market to make money,so,when your ahead,sell and pocket your money.Be patient,there are always opportunities to invest.Have you noticed how big money will drive a sector or ETF up,then get the media,newspapers and others they have in their back pocket push the sector they invested in,that is their way of getting the little guy to invest.If mutual funds,the little guys investor,did got buy stocks,who would the big boys sell to,not themselves.
I agree with King Ralph – Claus you have called the top of the market for a year and no bear market not even a side ways market.
My view is that at some time we roll over and have a long bear market going down for years (3 year) before we bottom – slow and painfully bear market.
Now i think that Big Ben will just keep printing with no regard to law of unintended consequences.
Banks should take all the burden for what they have created but instead the man on the street is dealing with all the laws of unintended consequences.
With all the fear mongering created over the failure of banks we have bail them out and are left with the mess. Higher Taxes (to come), more inflation, loss of value in our Properties, impossible to get any time of loans at fair rates.
Where as banks are give Free money to prop them up – which in turn they use to make more money and take on risks that no one else can take.
Life isn’t fair but surely there could of been a better result than the outcome we have.
Higher inflation’s lower growth (stagflation) better than a depression. This looks like the outcome.
lets see how it all turns out.
On Jan. 3 the S&P 500 was valued at .90 oz of gold. Yesterday the S&P 500 was also valued at .90 oz. of gold. Over the last 6 months the S&P 500 has gone nowhere. But the price of the S&P in dollars was up aboutf 6 per cent from Jan. 3. I count this as an inflation rate of 6 per cent approximately. If one per cent inflation cuts the real value of the debt by $l40 billion then 6 per cent would cut it by 840 billion. Yes the economy is also stagnating. So what is a good investment during stagflation? The Pro Shares Ultra Short continues its downward drift.
Hi Folks, I think Claus was/is right. But remember don’t fight with central bank. The only reason the stock market keeping up and up, is because our central bank is print money to support the market. We even don’t know how much money central bank pump into the market. but when the pump is shut, most would fall down. One thing is very clear, if QE3 would not in the picture, then the market would down for while. But if QE3 would launch, then Sorry Claus, people would blem you miss leading them again.
Well, the EUM position would have gotten stopped out today at 29.93. What good is it to risk so little downside on an equity instrument trading near its 52 week low of 28.47?
Klaus recommended PSQ some months ago, which is supposed to go up when the broader market goes down. I bought it at that time on his recommendation. Ever since, it has mostly gone down, even when the market goes down. The investment firm website cautions that this instrument is not to be held but is only good for a one to few days quick turnaround profit.
Klaus recommended we hold it as a inverse insurance against a tanking stock market.
Just try to do that with this PSQ. It doesn’t work. It just keeps bleeding money out of your portfolio. If it keeps dropping how can you ever sell it for at least what you paid? You cannot.
Claus, apparently you are getting criticism from people who have made bad short term investment decisions. Anyone who bought silver when it was near $50 per ounce and sold at $33 obviously will be crying the blues. If they were in such financial straits that they had to sell at $33, they never should have bought at $50 in the first place. Anyone who understands the quantity theory of money and looks at the overall money supply picture should understand that $50 silver should have been kept and more $33 silver purchased because it will go much higher than $50 in the not too distant future. Those who try to predict short term moves in any market are very likely to get burned unless they are really big players who can take a loss in stride and move on to higher profits.
A point that seems to be overlooked is that the Federal Reserve (FED) is the biggest player of all with almost unlimited funds. Losses do not mean anything to them because they can just create more money to replace it by making book-keeping entries. Yes, they do play in the markets and can manipulate them to fit their short term, and long term, objectives. In the following quote, open-market operations means purchasing and selling in the open market by the twelve member Federal Reserve Open Market Committee (FOMC) which is composed of the seven member Board of Directors plus five representatives from Federal Reserve Banks. FOMC stands for Federal Open Market Committee but this definition can be misleading because this is not a “federal†committee in the same sense as a federal government committee. The Federal Reserve is a private “for profit†banking cartel that has total control over the issue of money in the U.S. Thus I have correctly identified it as the Federal Reserve Open Market Committee. Here’s the quote:
“Open market operations are, of course, a highly flexible method of control. They can be speeded up, slowed down, or even reversed, from one day to another — or from hour to hour.â€
From The Federal Reserve System, edited by Herbert V. Prochnow, President, The First National Bank of Chicago and written by seventeen participating experts in the banking industry, five of which were part of the Federal Reserve System. Peter G.Fousek, Reserach Department, Federal Reserve Bank of New York, is just one example.
The following statements were made during hearings of the House Committee on Banking and Currency, September 30, 1941. Members of the Federal Reserve Board call themselves “Governorâ€. Governor Eccles was Chairman of the Federal Reserve Board at the time of these hearings.
Congressman Patman: “How did you get the money to buy those two billion dollars worth of Government securities in 1933?
Governor Eccles: “Out of the right to issue credit money.
Patman: “And there is nothing behind it, is there, except our Government’s credit?
Eccles: “That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.â€
Notice that Eccles said “If there were no debts in our money system, there wouldn’t be any money.â€
To fully understand this it is necessary to read a book titled “The Federal Reserve System, Purposes and Functions†authored by the Board of Governors of the FED.
The significance of this is that today’s published money supply figures do not include the debt, public and private. They also do not include the trade deficit which is more than seven trillion dollars. But this “debt money†IS PURCHASING POWER that drives prices up. Thus the published money supply figures are very misleading.
Playing in any kind of investment markets today without understanding the quantity of money in relation to commodities is simply playing Russian Roulette and you are likely to pull the financial trigger on a live bullet. This is also true of financial advisers who do not understand it.
The point is that there is a tremendous amount of dollars floating around the world and these are beginning to come home. The influx of these foreign held dollars, plus the flood currently flowing from Bernanke’s pen, will drive the prices of everything, including gold and silver, higher and what we are seeing now is just a prelude to what’s coming.
Hyperinflation is not very far away and when it enters its final stage, the price of silver and gold will not keep up with prices of commodities that provide the necessities of life. When that begins to happen, it will be time to sell gold and silver (because you can’t eat it) and invest in other commodities and perhaps farm land. The message that needs to be understood is that the final stages of hyperinflation always results in a rejection of the medium of exchange, whatever it’s called, and a return to the barter system – will you have something with which to barter when that day arrives?
The French political economist Frederic Bastiat (1801 — 1850) was absolutely correct in his essay “Abundance and Scarcityâ€. He said: (emphasis added)
“WEALTH CONSISTS IN AN ABUNDANCE OF COMMODITIESâ€
He did not say “Wealth consists in an abundance of paper.†However, if present assets can be ramped to a higher level by short term use of paper by those who can do it, use of such tactics may be personally beneficial. Even so, the long term objective of increasing the stock of commodities, should not be sidetracked by perpetually playing with, and holding, paper. The message is don’t hold paper until it becomes so worthless that you use it to cover your walls or start a fire, as the Germans did in 1923.
Generally speaking, the advise given by Money and Markets is good, depending on whether you are a short term, or long term, investor. Yes, there have been some timing mistakes for short term investors, but long term advise is good. Do not throw the baby out with the wash.
Bill Denman
this Claus guy has been crying wolf for over a year and the market just keeps going higher. Hey Claus if you say something long eenough eventually it will happen. the key is Claus to know when to sell, you obviously dont have a clue. i bet you have lost a ton of money for Mr. Weiss.
Everyone needs to understand that most analysts recommendations are wrong. The market climbs a wall of worry and if you can’t stomach this fact my advice is that you find some other “safe” investment such as a bank CD. The long term trend of the dollar goes from the upper left hand side of the chart to the lower right. That means down. USD strength at 1.42 Euro is a joke. What has really happened is that the USD has suffered a maxi-devaluation over the last 80 years. Stocks, metals, commodities all will rise based on USD devaluation. Period. Face it, Americans need to realize that we currently live in a third world environment. We are an emerging market. Period.