Stock Market Outlook…..October 16, 2014, still another 16% to 20% downside risk possibility
I want to emphasize that we are not short sellers and we believe that investors should always be invested in the stock market. Our difference with the view of many others is that we believe that profits should be taken and at all times there are numerous stocks that have been hammered down in price and are quite undervalued that merit investment consideration. By the way, we are positive on gold mining stocks and hard asset stocks. We feel that we are in a bottoming formation in gold stocks; we like many of them as we feel the true bottom for gold is between $1200 to $1350. The downside risk in gold is far less than the downside risk in the industrial stock market.
Harsh price declines offer superb buying opportunities. One major mistake that investors make is that they do not take profits off the table. In my September column, I suggested that when the two prime valuation gauges “Stock Market to GDP’’ and “Price to sales ratio” are at the levels that they are at, it eventually brings about a brutal downside for the stock market. Historically it would be in the over 25% range. But that is not to suggest not to invest but to await declines to accumulate shares.
However, I have never seen a market with such artificially low interest rates which can moderate or at least put off harsh bear markets. Actually, if rates stay low it would limit the downside. But going back fifteen years ago I had written that low interest rates will trump technical analysis, so I guess it should be no surprise. Still, when we see market declines we believe above all else that declines are opportunities to buy stocks while they are “on sale.” And yes, in our opinion there are many stocks that are presently on sale-many!
In 2007 and again in 2008, I wrote on the old Canaminvestor site that we would see the largest decline in asset values that the world has ever seen. I wrote it as “A Midsummer Night’s Scream” and when it happened a friend who is on television said that I should go on “Facebook” for having forecast it and warned him in 2007. Me? What for? There were numerous people that projected a harsh stock market decline was coming, Claude Lemire and Ray Langevin among many. Many non-brokerage people could see the decline coming. Montreal based money managers told me that in their view the brutal decline was coming.
There is a highly respected author whom I had told privately that the decline would occur. I later heard him quoting me in a radio interview. Actually, it was not a difficult forecast when I studied the cycles, the charts and above all the ludicrous valuation levels knowing full well that Wall Street had pushed the market and many stocks to insane excesses. When I say insane excesses, I must emphasize that there still are an enormous number of stocks that are not overvalued and a huge number are undervalued today.
But for each of the last three years using cyclical analysis, I had forecast a 20% to 25% decline in the overall stock market each which would have been followed by rallies. I was wrong. Why was my forecast wrong? Microscopically low interest rates which is almost “free money” to the market which must be put to work has flowed in at the highest levels in history.
But then consider the high frequency trading which can add to the market’s upside during a bull phase and contribute to overvaluations. We also believe but cannot prove that the central banks are active in the stock market offering huge buying support at times. We have these ingredients which has led to a high risk overvaluation of the large capitalization market such as the Standard and Poor’s 500 stocks. Again, always keep in mind that there are numerous individual stocks that are extremely undervalued.
The story of Japan? A Lesson in Paying Up! What I am suggesting is that the great danger to the market is overvaluation and again I am not referring to all stocks. In 1989, the Nikkei Stock Average was trading at over 39 000 as Japanese investors bought stocks at extremely overvalued price levels. Today it’s at the 14 900 level. So twenty five years later the Nikkei is down over 60% from its overvalued multi year high. That is a harsh lesson to be learned from “paying up” for stocks. 25 years!
Demanding investors’ attention is the fact that for the last year, officers and directors of the major companies have been selling their own personal shares at a very high rate and doing very little buying? However, at the same time companies have been buying back their own shares which brings upside and support into the market. The total amount bought in corporate buybacks is huge in dollar value and in percentage.
If we use our technical, cyclical and valuation analysis, they still indicate that we could see over the next six to twelve months an overall decline of another 16% to 20% from here. However, the ingredients that would prevent or at least limit such a hard decline are still in play. Just insist on buying value as always and take advantage of any “sales” as they occur. But still the overall large cap market such as the S&P 500 still has the risk of a further decline. Buy the way Gold investors, the gold stocks are one of the few sectors that have consistent officers buying their own company shares.
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