The stock market is sending very negative technical signals

         While our analysis suggests a decline possibility of 25% to 30%, there are some points that should be emphasized. Keep in mind that for a bull market in commodities that many of you readers anxiously await, we would need a bear market to occur in industrial stocks.  Recently, the stock market is sending some strong technical warnings; the Dow Jones Transportation Average and the Dow Jones Utilities Average, both lead indicators have been quite weak for the last there months. As well, the last six weeks have seen some of the largest total dollar value of officers and directors selling in decades with little buying; their sales totaled over $2,500,000,000. ($2.5 billion) The negative evidence keeps building.  Note well that officers and directors are the most informed of all investors.

But for three years we have projected a 20% to 25% correction which did not happen!  What we had wanted to see was a normal cyclical correction which allows the funds and institutions that must invest the opportunities to buy at cheaper price levels followed by rallies back up. As you know many funds are not allowed to hold large cash positions. It is a “must invest” requirement, despite overvaluation in many companies’ shares.  This has created, as in all major market tops a “vacuum.”

A vacuum is a way of describing the fact that far too many shares have been bought at the high end of their valuation levels and often at the high end of their three year price ranges. This creates a weak support for many stocks if a serious down move or bear market commences.  There will be a complete lack of support buying which will send many stocks on a downward slide. In essence, too many stocks have been bought at high prices above their historical proper valuation levels. They will return at least to their historical proper valuation levels. There will be no solid buying support at those high valuation levels in our view during a major decline.

                                    An example of a stock “vacuum” in the market

Let’s say that XYZ Manufacturing was selling at $27 per share in 2009 and it was recommended by several brokerage houses and investment services over six years. In the bull market, let’s say that it moved up to $81 per share. Above $65 per share, it has moved above its historical valuation range to a price/earnings ratio of 27 times earnings.  Too many shares may have been bought above $65 and will be sold as it moves to a more proper value.  Algorithmic and High Frequency traders will also profit from the opportunity to sell short in a down market with no uptick required. As always, the true investors will suffer.

Yet, to have a bear market generally we need to see rates rising, a slowdown in money supply growth and an economic downturn. None have really occurred…….as of yet.  But another ingredient has to be considered here. What is that ingredient? It is cycles!

                                      Cycles are of the greatest importance

Many various cycles occur often on or near to schedule. You are familiar with the four year stock market cycle and of course you should be aware of the seven year cycle in the stock market. Again, if we delve into the cycles, it sends a pretty strong message, that message is that a major bear market in industrial stocks will commence very soon.  We have cycles both long term and short term that simultaneously are projecting a harsh bear market commencing very soon. Couple that with some very high valuations and we expect a harsh bear market. I must mention that a major cycle(s) are now projecting a MAJOR BULL MARKET IN GOLD.

One must understand that no scheduled cycle must occur.  Yet, many cycles have accurate track records so they must be paid close attention to.  Moreover, we must emphasize that too many major cycles are occurring right in front of us that spell a bear market for the stock market that could last for several years. On a positive side, cycles project higher prices for commodities such as gold and oil. Yes, we could be commencing a hard asset cycle.  Suffice it to say that cycles are in our view more important than fundamentals.   

Keep in mind that in the markets today there is VERY LIMITED LIQUIDITY in many if not most publicly traded stocks. During a major move down in the stock market, finding buyers for shares may prove quite difficult without the enticement of brutal declines before buyers bring in needed support. Today’s narrow spreads have destroyed the needed support of the past.

The fact that “upticks” are not required to short stocks makes the downside potential even greater. The uptick rule should be reinstituted to protect the market. There are many excuses as to why it is no longer a regulation, but there are no valid reasons.