Since
the beginning of January 2014 stocks have shown signs of institutional
selling. This can be seen in the small capitalization stocks index the
Russell 2000. This group of stocks generally leads the S&P 500.
Most
bull market tops in the S&P 500 shown below take 8-12 months to
form before it starts to fall in value. So far the market has been under
distribution selling meaning the large traders (institutions, hedge
funds) is selling their positions to the average investor to be left
holding the bag when things go south.
The
chart posted below shows some of my analysis of the SP500 index. This
chart shows the 200 day moving average which is a great indicator of the
major trend of the market. Green means bull market, red indicates bear
market.
Also
you will see the red ATR (Average True Range) indicator at the bottom.
This tells us if the average daily movement for the index is high or
low. When this red area rises we know there is a large amount of money
flowing in and out of the equities market. It takes large amounts of
capital to do this and is
why the sellers are most likely hedge funds and institutions rebalancing
their portfolios for an upcoming trend change.
If
we step back and take a look at the bigger picture using the monthly
chart of the S&P 500 we can foresee what is likely to happen in the
next 12-36 months. The US stock market is losing momentum which can be
seen by the relative strength indicator at the top of the
chart.
Also the support trend line give us a feel on how soon a breakdown in price may happen. It appears to be just months away…
Taking
things one large step further back, roughly 70
years you can see some patterns of that in the past. The question is not
will there be a bear market, but how far will it correct?
The
cart below shows a very bullish outlook of a minor correction of 30% in
the next 36 months. Also I do have analysis that shows that if we break
below the 30% level we could have a 50-60% correction which could
trigger a chain reaction of issues including the US bond bubble to
burst.
US Stock
Market Conclusion:
In short, the US stock market continues to grind higher but with several warning signs to investors who know how to spot them.
There
are three ways to play a bear market. The first is to do nothing, which
is what most people do as they watch their life savings slowly
evaporate right in front of them month after month.
Second, is to liquidate a large portion of equities and sit safely in cash while others lose money.
The
third and last is to position yourself to profit from a falling market.
It’s known that stocks fall 4-7 times faster than they rise, which
means you can potentially make 7 years’ worth of profits in just 1-2
years if done correctly.
These
are ways to play a bear market, and I say play because you do need to
be a little more active to enter and lock in profits in this market
condition.
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