IT’S HIGH RISK, SO INSIST ON VALUE, TAKE PROFITS, CONSIDER GOLD STOCKS

For three years, we have said that the stock market should have a downside of 20% to 25% which would be normal. After those forecast corrections that never transpired, we would expect good moves up again as the market would still have a general upward direction after getting rid of the excesses. It was our expected cycle. It also creates a much safer investment market as opportunities arise that permit investors to invest when certain stocks and the markets are cheap. That creates healthy markets and limits the chance of long duration bear markets. Overvalued markets bring very heavy risk.

And why you may ask is it beneficial to have harsh corrections? Few investors realize that the market is dominated by large institutions that MUST invest every month. No matter what the price or level of the market, money must be invested at no matter what the price. They cannot sit on large cash positions. When heavy investing occurs at high prices and high valuation levels, it leads to brutal and long bear markets.

What do we believe? The technical analysis or the flood of zero interest rate money. The indicators tell us that if the technical analysis is correct, it will be very unpleasant. But if rates remain artificially low, the market does not generally face a long harsh decline. But eventually, overvalued markets “pay the price.”

While the technical indicators suggest that a bear market could commence soon, the concern is that the high valuations that the overall market is carrying would probably bring a severe bear market as bear markets commencing from these valuation levels are long and damaging. The S&P 500 is currently selling at the highest price to sales ratio ever. Ever! And the value of all U.S. traded stocks is approximately $21 to $22 trillion dwarfing the U.S. Gross Domestic Product of approximately $17 trillion. Historically, those two valuation levels have led to brutal bear markets and only occurred twice in the last 100 years.

Cycles…..Pay attention….

And let’s not forget about the cycles. Cycles you say?   Are they valid? The fact is that there are many cycles and while they often are close to schedule, they can fail as well. But disregard cycles at your own risk. You might consider this cycle ………In 1966, the Dow Jones Industrials made an all-time high just missing 1000, it was the top……..it worked its way back up into 1973 top followed by a bear market. It worked its way back up again to a 1981 top followed by a brutal bear market. Then it moved up again to a major high in 1987 which led to the largest decline in history. See any pattern such as seven years? The seven years from the 1987 bottom to 1994 high was followed by a decline but not as brutal as the prior cycles. But the harsh down cycle hit again as the market rallied into 2001 where the market saw another brutal bear market…Seven years by the way! Then the market rallied into 2008 where another vicious bear market followed….but the Fed arrived to bail out the banks and brokerages and pumped liquidity into the system that brought about a tremendous move up in the stock market to 2015. That current 2015 happens to be on a seven year cycle high. We are quite concerned and you should be too. So you have the cycles coupled with extremely high valuations-a dangerous combination.

We never are out of the stock market and are always heavily invested. Yet, we try to focus on what is cheap and undervalued. There are always thousands of stocks that merit attention. The major U.S. Brokerage houses rarely find stocks when they are undervalued. So you look elsewhere for ideas.

Gold is a positive in this scenario

We have said for years that a bull market in gold and gold and silver stocks requires a weak industrial stock market. Our analysis suggests that may soon occur.