Here is the case for a bear market. We're not convinced it will play out this way, but looking around in the world economy, apart from the US, it doesn't look good, so it's prudent to keep these things in mind. From Zacks.
Right now there is a tug of war going on between bulls and bears. That explains the violent drop to start the year followed by an equally impressive bounce. That same chain of events took place last year August through October. Yet by my estimation the bears are winning the war. And now after this latest bounce is the perfect time to grab the rope with them for the next pull lower.
So yes, my goal is to get you to appreciate the bear argument to make changes to your portfolio. Not just to survive, but thrive in this environment that will likely last another 6-12 months.
That's because sticking your head in the sand to wake up to 30-50% losses is not an effective strategy. Hiding in cash is better... but why do that when there are ample profits to be made riding the bear to the finish line?
There is no singular data point or piece of evidence that guarantees that a bear market is on the way. Rather it is about assembling a case where the preponderance of the evidence points to the verdict.
In my recent commentary for the Reitmeister Trading Alert I have pointed out more than a dozen bearish arguments. However, putting them all here today might take the better of the weekend for you to read. Instead I am going to share with you the 4 best reasons to get bearish now.
#1- Bear Markets Are More Common Than You Realize
As human beings we are hard wired for pain avoidance. With that you see many investors trying their best to rationalize why a bull market will stay in place even when the odds keep stacking up against them.
Part of the problem is that most investors don't really appreciate how commonly bear markets occur. Yet as this chart shows you, there have actually been 25 bear market drops of 20% or more the last 87 years.
We all know that night follows day. Just as well bear markets follow bulls. The timing of which is just less certain. So with this being the 3rd longest bull market over that same 87 year stretch, it says that we are getting pretty close to the end.
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Bear Market Deadline Nears
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#2- Earnings Recession
Look at this long term chart showing the EPS for the S&P 500 compared to the movement of the underlying stock index. You will notice that earnings rarely go sideways for any extended period of time. They are either trending up or trending down. And once the earnings start heading south, so too does the market.
As you can see by this chart, the earnings picture has likely already peaked and is starting to come down. Given history it says it will only get worse from here.
#3- Technical Picture
There are so many different flavors of technical analysis and it's easy to find one that contradicts another. However, one of the most time tested forms of technical analysis is the Dow Theory. Few models have a better track record for aligning investors with the long term trend than this indicator.
As it turns out the Dow Theory sell signal was issued in January 2016. And 60% of the time that signal is followed by a bear market.
Again, nothing in the world of calling a bear market is foolproof. But 60% likelihood of calling a bear market on this indicator, plus the rest of the evidence, starts to get pretty convincing.
#4- Valuation
Academic research is very clear on this point.
Low PEs = fertile soil for future stock advances.
High PEs = low odds of investment success.
The chart below, based upon the Shiller PE measure, proves this out. And right now the Shiller PE stands at 25.
You may be looking at the 10 year return of +0.9% and saying to yourself"what's the big deal...it's not negative".
The big deal is that the market never goes sideways for a long period of time. The only way to come out with a return so low is to have a bear market or two mixed in to drive down results. This is pretty much what happened after the tech bubble of 1999 and how the next decade gave virtually no gains to stock investors thanks to two nasty bear markets.
Indeed the current valuation picture says that a bear market should soon be on the way to cut stocks down to size.
What to Do Next?
I strongly encourage you to get ahead of the coming bear. Don't just bail out or ride it out. This is a unique opportunity to make substantial profits from it.
That's why I am inviting you to download my newly released Bear Market Manifesto free.
This Special Report provides additional information that could prove critical to your portfolio in weeks and months to come. Most importantly, it reveals my stock market strategy and 5 specific trades that I have made for my personal portfolio to beat the bear.
You might want to download right away because this free opportunity ends midnight Sunday, March 6.
Free Download: Bear Market Manifesto >>
Best,
Steve Reitmeister
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