2014
was a tough year for small cap stocks. The Russell 2000 index which is a
great barometer of what speculative money is doing as a whole. History
has shown that small capitalization stocks are the first group to show
weakness after a multi-year bull market.
For
all of 2014 this group of stocks has been struggling to hold up. Each
time it nears a previous high, sellers come out of the woodwork and
unload shares in large volume. This was the first tell-tale sign that
institutions are
starting to rotate their positions out of these high beta stocks.
Later
that year in October 2014 the S&P 500 fell 10% in just a few weeks.
The speed of the selloff and the heavy volume that accompanied
it are yet another warning sign that the underlying strength of the
stock market is weakening. This broad market selloff included the large
capitalization stocks which means the end is nearing.
If we turn our
focus to the Dow Jones Industrial Average and look at the chart below you will see my prediction for 2015/2016.
I should be clear on what to expect during market tops because they differ than market bottoms.
Most bottoms that occur are powered by fear. And fear has a price pattern on the chart that is much different than what we see during market tops when optimism is high.
Bottoms
tend to be more violent with large range bars and the process happens
in half of the time than what a bull market top requires.
Bull
market tops take
longer to form and for price to actually breakdown and confirm it’s
headed lower. My thinking is that a market top may have already started.
The underlying metrics are eroding and the heavy volume selloff in Oct
2014 was the first major signal that big money is selling.
I
do feel the market as a whole can and will make some minor new highs,
but will have strong bouts of selling shortly after. Late 2015 and going
into 2016 is when the US stock market will likely start to get volatile
and we will see the first MAJOR drop in value. It will be similar to
the first breakdown bar that took place Jan 2008. A 15-20% drop that
breaks the Oct 2014 low is going to be the straw that breaks the camel’s
back.
Once
we get the initial break in price the market should pause or bounce for
a few months as investors are still overly bullish at these BARGAIN
prices “they think” and buy more shares. In reality it’s
the worst thing an investor can do at this stage of the stock market
life cycle.
Once the bear market starts investors should expect 12-24 months of lower and sideways price action.
So How Do We Take Advantage Of This?
There
are two ways to play the next bear market. First is to simply move your
money out of stocks. This means sell long positions, pull
money out of mutual funds etc… and just hold your money in cash. Cash is
king and by doing this you will retain your current level of wealth and
be ready to invest when the time comes later in 2016/2017.
The
second
option is to do the same as above but to put a portion of your money to
work in a way that will allow you to profit from a falling stock
market. That is to invest in ETFs specifically inverse funds.
Inverse
funds rise in value as the stock market price falls. For example if the
Dow Jones Industrial Average drops 35% over the next 24 months, your
investment would rise 35%, 70% or even 105% depending on the type of
fund purchased.
No comments:
Post a Comment