Caution advised, wait for some “sales” on stocks…good news for Gold

                               The Ominous Indicator….Stock Market Value to Gross Domestic Product

Generally speaking, we are always fully invested in the stock market. We look for stocks that are suffering through bear markets and take positions. We are bottom fishers in every sense. For three years we were expecting on average 20% declines followed by returns up which would have washed out or at least limited overvaluations. However with near zero interest rates, the reasonable and normal corrections have been avoided. Corrections and bear markets permit investors the opportunity to invest when stocks are on sale. Simply stated, better and cheaper buying opportunities present themselves regularly. It is when excesses are flushed out.

The Federal Reserve knows well that today the economy requires a strong stock market and we believe it is often there offering support to the market. For five years I have said that the pension funds in the U.S. are woefully underfunded. Now you can find it covered in the press-finally. We wrote of that problem over five years ago.

Technical Analysis is a valuable tool for investors. However, pumping zero interest rate money into the market trumps technical sell signals. However, harsh corrections would have been a better environment for real investors. (non High Frequency Trading investors). High valuations always, yes always, lead to severe downsides either for individual stocks or the overall stock market.  The valuations that we currently carry by one key gauge would suggest a minimum downside risk of 30% from the recent high.  Our analysis suggests 25% or so downside risk.

       The value of the United States stock market to US Gross Domestic Product is a very informative value indicator. The stage has been set in place for several months shouild anything should go wrong. What stage? Recently, the value of US traded stocks which include the S&P 500 plus the NASDAQ was reported at a total value of $25 trillion!  The numbers are $25,000,000,000,000.

My estimate suggests that there is some duplication here and it also includes non-United States companies so a more accurate value might be closer to $22 trillion. Next, we compare it to United States Gross Domestic Product which will come in for 2014 at approximately $17 trillion. We divide the value of stocks by the US GDP which will give us the percentage of stocks to GDP…..Today that is 129% of GDP. It is a very high level historically speaking. In the late 1920’s, “Stocks to GDP” was as high as 109% and in 2001 it hit 187%…..However, if we do not include the Nasdaq value in 2000-2001 which was an incredible and illogical $6.7 trillion and focus on the Standard and Poor’s 500, the “Stocks to GDP” high of 2001 matches very closely to the overall value the market carrying today. Suffice it to say that we are at a level that as a timing gauge is imperfect but as a prelude indicator has effectively advised “watch out” when we saw the two times in the past when it did occur,  Brutal downsides for the stock market followed.

For now we see the risk of a painful bear market and by using  cyclical analysis, we should expect to see a bear market. But then, with zero rates and perhaps the Fed involved, we may not see it. Suffice it to say, based upon valuations, a harsh bear market would be a normal occurrence this fall.

The good news is that  many stocks will be on sale and one key requirement for a bull market in gold and gold stocks is a bear market in the industrial stock market such as the S&P 500 and Dow Jones Industrials. But be careful what you wish for, you might get it.