Protecting Retirement Principal from the Next Bear Market

Historically, What Do Stocks Do Before And After The Fed Starts Hiking Rates?...

Sooner or later, the Federal Reserve will begin normalizing monetary policy, which means higher interest rates are coming.

This has investors rightfully worried because higher rates mean higher interest costs, which should be bad for profits and ultimately stocks.

Deutsche Bank Chief US Equity Strategist David Bianco examined the history of Fed rate hikes and their impacts on stocks.

"Stocks typically sell-off on the first of a series of rate hikes, but the magnitude and duration of the sell-off depend on conditions," Bianco writes. "During early cycle hikes the initial sell-off was generally small, quickly recovered and further S&P gains came in next three months and longer (like 2004, 1983, 1972). But many sell- offs on late cycle hikes became corrections or even bear markets."

Unfortunately, it's only in hindsight do we know where we are in the cycle.

"Determining whether it’s early or late in the cycle is subjective, but the shape of the curve, inflation measures, years since the last recession can help," Bianco said. "Next year is likely another mid-cycle year and we don’t expect a severe S&P reaction to hikes, but the risk is the Fed hikes too late or too little and inflation accelerates requiring the Fed to hike to levels higher than expected."

Bianco's 27-page research note is riddled with exhibits. But we thought this one was pretty elegant.

It's the average price move of the S&P 500 during the 4 months before and the 6 months after the 1st rate hike. It's the average of the last 7 hikes.

It's not the most helpful chart for people who enjoy obsessing over the details. It does, however, show that the general direction of the stock market tends to be up.


Read more: http://www.businessinsider.com/how-stocks-move-around-first-fed-rate-hikes-2014-9#ixzz3EMoczX9P

Bearish Omen: NYSE Margin Debt is At High-Risk, Pre-Crash Levels...

Back in March, bond guru Jeffrey Gundlach was warning that margin debt, which reflects the dollar volume of securities investors have purchased through borrowed money, was in "the scary zone." At the time, NYSE margin debt surged to $465 billion.

After dipping for a few month, margin debt is back on the rise. As of June, NYSE margin debt is just short of those all-time highs.

For longtime market observer Dennis Gartman, this means the stock market is ripe for a correction.   

"...since ’09 margin debt has risen from $200 billion to nearly $475 billion as of two months ago and historically margin debt actually begins to weaken from its highest levels before stock prices begin to turn downward," he writes. "If the highs were made a few months ago in margin debt, the market is more vulnerable now than it was, if history is prologue to the future. Although past performance by mutual and hedge fund managers is not, according to the SEC, indicative of future performance, when it comes to margin debt the past truly is a guide to the future." 

Doug Short, who published the data to which Gartman refers, is a bit more sanguine. He notes that the data are already several weeks old when published, so we can't say for sure whether we're seeing a major shift in margin debt. 

Some also believe margin debt levels are a more benign coincident indicator whose recent movements are merely reflecting the increasing presence of hedge funds.

For his part, Gundlach said it may actually be difficult to tell whether the surge is a cause or effect of the broader market rally.

But it's clearly something investors are watching closely.

Getting Long In The Tooth? The Bull Market Celebrates It's 5th Birthday...

A 5-year anniversary should give pause to anyone who lends much credence to stock market history.

Going back to 1921, the current bull market's rally is only 2 percentage points shy of the average performance. And the average bull market has lasted only 6 weeks longer.

The median bull-market return and duration are +115.4% and 50 months, respectively—leaving the current bull market looking long in the tooth indeed.

John Bogle Predicts Two Potential -50% Meltdowns In The Next 10 Years!

Vanguard's John Bogle went on CNBC recently and made the most amazing statement.

He predicted TWO -50% corrections in the stock market over the next ten years.

Hard to believe?  Look at a screen shot from his TV appearance.

Here are some equally amazing quotes from this TV appearance:

“Don’t worry about what stocks are doing today, tonight, or tomorrow…..look out a decade. It requires some guts to do this…”

Doesn't sound like a good plan for retired people, does it?

The Past Century's 3 Worst Market Slumps...

Why Capital Preservation Is Paramount In This Climate...

One of our key indicators turned bearish for stocks in August.

When the 50-day BLUE moving average, is ABOVE the 100-day RED moving average, stocks are in an uptrend and stock market risk is below average.

When the 50-day BLUE moving average, is BELOW the 100-day RED moving average, stocks are in an downtrend and stock market risk is above average.

In the 2nd week of August, the 50-day BLUE moving average, crossed BELOW the 100-day RED moving average, increasing the odds that a new bear market may be at hand.

As a result, we have significantly reduced our stock market exposure in our managed accounts.

Until the S&P 500's 50-day BLUE moving average crosses ABOVE the 100-day RED moving average again, we will maintain a defensive posture, largely in cash.

Risk is too high and the odds of a severe market decline are too great to do otherwise.

John Harris

Bear Markets Not Accompanied by Recessions Are Less Severe...

Chart of The Day: A Historical Perspective on Post-Massive Bear Market Rallies

Today's chart illustrates rallies that followed massive bear markets. For today's chart, a 'massive' bear market is defined as a decline of greater than -50%.

Since the Dow's inception in 1896, there have been only three bear markets whereby the Dow declined more than -50% (early 1930s, late 1930s until early 1940s, and during the very recent financial crisis).

Today's chart also adds the rally that followed the dot-com bust during which the Nasdaq declined -78%.

The current Dow rally has followed a somewhat middle of the road path and has most closely followed the post dot-com bust rally that began back in 2002.

If the current rally were to continue to follow the post-massive bear market rally pattern, the market would have to resume its rally in relatively short order.


Commentary & Analysis Courtesy of Chart of The Day

Post-Massive Bear Market Rallies: Historical vs.The Present

Chart & Analysis Courtesy of ChartOfTheDay.com

Today's chart illustrates rallies that followed massive bear markets. For today's chart, a 'massive' bear market is defined as a decline of greater than -50%.

Since the Dow's inception in 1896, there have been only three bear markets whereby the Dow declined more than -50% (early 1930s, late 1930s until early 1940s, and during the very recent financial crisis).

Today's chart also adds the rally that followed the dot-com bust during which the Nasdaq declined -78%. The current Dow rally has followed a path that is fairly similar to that of the Nasdaq rally that began in late 2002 as well as the Dow rally that began in 1942.

It is worth noting that after 300 (plus or minus) trading days the market moved into a trading range/choppy phase that lasted for a year or more.

Are We 10 years Into A 16-Year Secular Bear Market?

Last week, the Dow Jones Industrial Average rose above 10000—again.

Since March 16, 1999, when it first touched 10000 in intraday trading, the Dow has bounced over that threshold and back 63 times.

On Friday, the index closed 220 points below where it stood exactly 11 years ago.

This isn't the first time stocks have been stuck on a seemingly endless pogo-stick ride.

On January 18, 1966, the Dow hit an intraday high of 1000.50. It broke through the 4-digit barrier 3 more times that January and February, then faded. The Dow cracked 1000 again in 1972 and 1976, then fell back both times.

Not until December 1982 did the Dow finally hurdle above 1000 and stay there.

Are we 10 years into a similar 16-year secular bear market?

Jason Zwieg, Wall Street Journal
 
The Intelligent Investor: 11 Years and Counting - WSJ.com

Status Of This Market: Bull or Bear?

Ned Davis Research reports that the average bull market since 1900 has produced gains of +81.2% and that the S&P had popped up +79.93% through April 23. Therefore, this bullish phase is long in the tooth. 

According to Bespoke Investment Group, there have been 58 corrections of -10% or more in the Standard & Poor's 500 since 1927.

In 25 cases (43%), corrections that reached the -10% mark went on to become a full-fledged bear market, while 57% stopped short of turning truly ugly.

However, Bespoke also warns us that in the 32 instances when the market has dropped as much as this one (as of June 7th the S&P had pulled back -13.7% on a closing basis and -14.68% on an intraday basis) the corrections have a distinct tendency toward continuing.

According to Bespoke’s research, only 7 corrections of this magnitude stopped short of the bear market definition (generally defined as a decline of -20% or more). 

And in the 25 instances in which the decline reached the -20% mark, the average decline of the bear move was -35.5% from top to bottom.

In light of the above, it's prudent to err on the side of capital preservation until the climate improves.

Bullish Omen: % New Highs Establish A New Cycle Peak

Ned Davis Research Reports that the Percentage of New Highs on the New York Stock Exchange hit the highest point of this cycle on January 8th at 26.7%.

Bull markets typically don't expire directly after a peak in the % of New Highs has been reached.

Since 1967, the median lead time between the peak in New Highs and the top of bull markets has been a little more than 7 months.

The fresh peak in New Highs implies that the risk of new bear market is highly likely to be several months away, and market risk is not likely to become problematic until at least the 2nd half of 2010.