Best of the Week
Most Popular
1.A 'Wicked Rally' in Gold Price Predicted - The_Gold_Report
2.Gold and Silver Bullion Buying Opportunity for 2017? - Nadeem_Walayat
3.The Coming Stock Market Crash and WWIII - Brad_Gudgeon
4.First UK BrExit then Trump, Next BrExit Tsunami Wave to Hit Italy HARD Sunday! - Nadeem_Walayat
5.Trump Sets The Stage For A Huge Gold Rally In 2017 - James Burgess
6.Why We Haven’t Seen Gold Price Rally after Trump Victory - Harry_Dent
7.Silver Bullion Price Buying Opportunity for 2017? - Nadeem_Walayat
8.Trump Stocks Bull Market Furious Rally Towards Dow 20k as Bear Mantra Persists - Nadeem_Walayat
9.Gold Bullion Price Buying Opportunity for 2017? - Nadeem_Walayat
10.Trump's Presidency - Stock Market Crash or Start of New Mega-Trends - Sol_Palha
Last 7 days
Official Warning: Stocks Are Going to Crash - 10th Dec 16
CIA Warns Donald Trump is Putin's Manchurian Candidate! - 10th Dec 16
Gold Fools, US Dollar Bulls and The Long Term Outlook for Both Markets - 10th Dec 16
Stock Market Saeculum 1st Turning Underway - 10th Dec 16
India's Stock Market: Nothing "Random" About It - 9th Dec 16
Gold Futures Selling Exhausting - 9th Dec 16
Cheap Large Icicle Christmas LED Lights Review - B&M Stores - 9th Dec 16
US Interest Rates and the Toughest Man Who Ever Lived - 9th Dec 16
Amazon UK Christmas Shopping Useless Delivery Tracking Warning Alert - 9th Dec 16
Euro-zone Crisis - The Soon To Erupt Euro Experiment - 9th Dec 16
Global Market Perspective 3 Killer Charts, 2 Fast Looks at Politics - 9th Dec 16
Trump Could Fuel A Nuclear Energy Boom In 2017 - 8th Dec 16
Our Future Economy, Jobs, Banking, And Governance – Part2 - 8th Dec 16
Developing Knowledge-Intensive Society and Knowledge Industrial Hub in Kerala - 8th Dec 16
Crude Oil and Gold, Silver Precious Metals Link - 8th Dec 16
Stock Market and the Great Middle Class Revolt Gets Bigger - 8th Dec 16
Protectionist Trump Policies To Crash Dollar, Gold and Bitcoin to Soar - 8th Dec 16
The Jaws of Life : The Most Hated Stocks Bull Market in History! - 8th Dec 16
Infrastructure A Budding Asset Class - 8th Dec 16
Trump Stocks Bull Market Furious Rally Towards Dow 20k as Bear Mantra Persists - 8th Dec 16
More Talk About More Economic Growth and More Globalization - 7th Dec 16
Cracks In US Treasury Bond Market, The Japanese Factor - 7th Dec 16
The Rise of Anti-Establishment Italy - 7th Dec 16
Trump Likely to Drive Another Bump in Stock Market Buybacks — Here’s How to Hedge - 7th Dec 16
World War II and the Origins of American Unease - 7th Dec 16
Online CFD Trading for Traders on a Budget - 7th Dec 16
Silver Bullion Price Buying Opportunity for 2017? - 7th Dec 16
The Imminent Multi-Trillion Dollar Surge In Social Security & Medicare Costs - 7th Dec 16
Gold Bullion Price Buying Opportunity for 2017? - 6th Dec 16
Shariah Gold Standard Approved for $2 Trillion Islamic Finance Market - 6th Dec 16
THE Gold Play for 2017 - 6th Dec 16
Trump Sets The Stage For A Huge Gold Rally In 2017 - 6th Dec 16
BrExit Tsunami Claims Emperor Renzi's Scalp, Counting Down to End of the EU, Next? - 6th Dec 16
Failed EU - Means an Expanded Dictatorship - 6th Dec 16
Crude Oil Prices: "Random"? Hardly - 5th Dec 16
The Coming Stock Market Crash and WWIII - 5th Dec 16
This Past Week in Gold Market - 5th Dec 16
Stock Market Short-Term Correction Underway - 5th Dec 16
If Trump Doesn’t Do This, We Will Have the Great Depression 2.0 - 5th Dec 16
India’s Demonetization Could Be the First Cash Domino to Fall - 5th Dec 16
Our Future Economy, Jobs, Banking, And Governance - 5th Dec 16
Gold and Silver Bullion Buying Opportunity for 2017? - 4th Dec 16
First UK BrExit then Trump, Next BrExit Tsunami Wave to Hit Italy HARD Sunday! - 3rd Dec 16
The 10YR Yield and SPX Stocks Bull Markets - 3rd Dec 16
Gold And Silver – Do Not Expect Much Difference With Trump Compared To Obama - 3rd Dec 16
Gold, Currencies and Markets Critical 61.8% Retracements - 2nd Dec 16
Gold Junior Stocks Q3’16 Fundamentals - 2nd Dec 16
Adventures in Castro’s Cuba - 2nd Dec 16
We Are Putting Off the Inevitable - 2nd Dec 16
Macroeconomic Cycles & Demographics - A Fuse, An Explosive and The Igniting Catalyst - 2nd Dec 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

$10000 Gold

Stock Market Herd is Heading for the Cliff

Stock-Markets / Stock Markets 2015 Dec 29, 2015 - 02:57 PM GMT

By: James_Quinn

Stock-Markets

You would think investors (muppets) would be grateful for the extended topping process of the stock market, as it has given them the opportunity to exit before the inevitable crash. As CNBC and the rest of the mainstream media spin bullish stories to keep the few remaining mom and pop investors sedated and the millions of passive working Americans invested in their 401ks, the Wall Street rigging machine siphons off billions in ill-gotten gains, while absconding with fees for worthless advice.


Does the average schmuck know the S&P 500 stood at 2,063 on November 21, 2014 and currently sits at 2,056, thirteen months later? Based on the media narrative, we are still in the midst of a raging bull market. John Hussman provides the counterpoint to this narrative with unequivocal factual evidence based upon a hundred years of stock market data and valuations. Anyone investing in today’s market should expect ZERO returns over the next ten years and a 40% to 55% plunge in the near future. And as a cherry on top, a recession has arrived.

The summary of this outlook is straightforward. I view the equity market as being in the late-stage top formation of the third financial bubble in 15 years. Based on a century of evidence relating the most historically reliable valuation measures to actual subsequent market returns, neither a market plunge of 40-55% over the completion of the current cycle, nor the expectation of zero 10-12 year S&P 500 nominal total returns, nor the likelihood of substantially negative 10-12 year real returns should be viewed as worst-case scenarios – they are all actually run-of-the-mill expectations from current extremes. Based on the joint behavior of the most reliable leading economic measures (particularly new orders plus order backlogs, minus inventories), widening credit spreads, and clearly deteriorating market internals, our economic outlook has also moved to a guarded expectation of a U.S. recession.

The Federal Reserve has encouraged the rampant speculation over the last few years with their trillions in QE gift to Wall Street banks and ZIRP, which allowed the “brilliant” 30 year old Ivy League educated high frequency traders to take the free Fed money and front run their client’s trades and generate guaranteed profits. Of course, ZIRP also forced grandmas throughout the country to acquire a taste for cat food in order to survive. But Ben and Janet are “heroes”, I’m told. What a coincidence that shortly after the QE spigot was turned off on October 29, 2014, the market has gone nowhere. The speculative juices appear to be drying up.

Because speculation tends to be indiscriminate, the most reliable measure of a robust willingness to speculate is the uniformity of market action across a broad range of individual stocks and security types. An overvalued market populated with speculators who still have the bit in their teeth will tend to hold up or advance further despite valuation extremes. Because of the Federal Reserve’s relentless and intentional encouragement of speculation in the half-cycle since 2009, even measures of overvalued, overbought, overbullish extremes – which had historically been followed almost invariably by market collapses in prior market cycles – were followed instead by further market advances.

John Hussman, inconveniently for those of a bullish ilk, notes that market internals have deteriorated rapidly, with only a few beloved, overvalued, overhyped tech stocks holding up the market. Most stocks are already in a bear market. Corporate profits are falling. PE ratios are high. Consumer spending is anemic. The jobs growth narrative is false. Real household income is at 1989 levels. Based on history, current conditions have only been seen at major tops. I’m sure this time will be different and Cramer, along with all the highly paid Wall Street shills, will be right.

Now that market internals have clearly deteriorated following overvalued, overbought, overbullish extremes, with reliable valuation measures at obscene levels and emerging economic weakness, a century of history suggests that the stock market is vulnerable to the risk of severe losses. Investors should not assume that the “support” that keeps losses relatively shallow during a drawn-out topping process will persist. There’s some truth in the old saying “the bigger the top, the steeper the drop.” Only a few points in history have seen the S&P 500 within 3% of a record high, with both overvaluation and unfavorable market internals during at least 80% of the prior 26-week period. Aside from points in recent months, the other points were major tops in 2007, 2000, 1972, 1969, and 1961.

When you talk to your relatives, neighbors and coworkers they all act like they are buy and hold long term investors. They are either lying or oblivious. Someone who is 60 years old and has accumulated a significant 401k nest egg invested in stocks can not afford a 50% haircut in their retirement portfolio. Anyone with a significant amount in the stock market will have to have balls of steel to not panic as their life savings is cut in half – AGAIN. Three times in fifteen years is pretty hard to swallow. The debt markets (junk bonds) are a flashing red warning light. To not heed the warnings of the market would be foolish. Hussman couldn’t be any clearer, just as he was in 2000 and 2007.

I really do implore investors who could not comfortably ride out a market collapse similar to 2000-2002 or 2007-2009, or who rely on their assets to finance near-term spending plans, to shift their risk exposure down to a level that could tolerate that outcome. Understand that while valuations have been hostile for years, and while overvalued, overbought, overbullish conditions have repeatedly emerged in the recent half-cycle without effect, the hinge that supported continued gains was a persistent willingness to speculate, as conveyed by uniformly favorable market internals. That support has dropped away. Ignore that key distinction at enormous risk. The market behavior we’ve observed in recent quarters is fully consistent with an extended top formation. With credit spreads predictably widening in successively larger spikes, that formation appears increasingly vulnerable to a steep vertical break of prior support.

Robert Prechter perceptively notes that investors act in a herd like manner thinking that because the herd is still invested in the market and has not sensed danger yet, it must be safe. Investors are lazing around the waterhole like unsuspecting gazelles. This herd will be running for their lives in the near future, as danger is lurking.

Still, we doubt that most speculators think about the decision to accept market exposure in such a systematic way. On that point, Robert Prechter of EWI offered a brilliant perspective last week to describe the typical behavior of speculators. He observed, “In neither case – buying or selling – is there any thought about taking on risk, rationally or otherwise. In both cases, they are unconsciously acting to reduce risk, thanks to the emotionally satisfying impulse to herd. Herds act to gain sustenance or avoid danger. Gazelles may lope together toward the water hole or dash in a herd from predators. The goal, albeit unconscious, of both types of actions is to reduce risk. Likewise, in market advances speculators herd as if trying to gain sustenance; and in market declines they herd as if trying to avoid getting killed… Subjectively, i.e. in their own minds, speculators perceive greater risk as less risk and less risk as greater risk. That is why they buy in uptrends and sell in downtrends. In the former case, they behave as if the herd is leading them to sustenance, and in the latter case they behave as if the herd is leading them away from danger. Ironically, the truth is wholly the opposite.”

If you have an ounce of common sense, ability to think critically, and appreciation for risk, you should leave the herd now before the inevitable stampede. Staying with the herd as it heads for the cliff is not an effective strategy.

At present, we observe a herd at the peak of a valuation cliff, where an increasing proportion of the herd is backing away. It’s increasingly urgent to dig in one’s hooves to keep from dashing over the edge. We can do little for those who insist on remaining in full gallop, imagining that sustenance awaits them ahead.

After experiencing two Federal Reserve induced booms and busts in the last fifteen years, you would think people would learn. But the true lesson of history is that people never learn from the lesson of history.

How did the S&P 500 trace out a total return of zero between 2000 and the end of 2011? By first losing half its value, then more than doubling, then losing more than half its value, and then doubling again. Across history, extreme valuations have invariably been followed by similar behavior – wide cyclical swings, yet only modest overall returns over the following decade.

Anyone fully invested in the stock market at this point in time is delusional and mad. If they think they can sense danger before the rest of the herd and exit once the stampede starts, they are badly mistaken. Just as they were in 2000 and 2007. Now is the time to regain your senses and stop playing in this rigged Wall Street game.

After years of Fed-induced yield-seeking speculation that has driven equity valuations to the second most extreme point of overvaluation in history (and the single most extreme point on the basis of median valuations), investors have somehow convinced themselves that this time will be different; that this time the market will maintain at a permanently high plateau. That belief is nothing new – it’s the same delusion that investors have held at speculative peaks across history, refusing to accept the familiar signs of danger until the equally familiar losses were conclusively in hand.

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.”

Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

Read Hussman’s Weekly Letter

Join me at www.TheBurningPlatform.com to discuss truth and the future of our country.

By James Quinn

quinnadvisors@comcast.net

James Quinn is a senior director of strategic planning for a major university. James has held financial positions with a retailer, homebuilder and university in his 22-year career. Those positions included treasurer, controller, and head of strategic planning. He is married with three boys and is writing these articles because he cares about their future. He earned a BS in accounting from Drexel University and an MBA from Villanova University. He is a certified public accountant and a certified cash manager.

These articles reflect the personal views of James Quinn. They do not necessarily represent the views of his employer, and are not sponsored or endorsed by his employer.

© 2015 Copyright James Quinn - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

James Quinn Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife