Stock Market Returns, Catching it All

This blog post will be a little long and eventually will probably be moved to the front page of our website.  It contains our essential view of what has happened over the past 14 years and the probabilities moving forward toward 2017.

The current market run since December 2012 has been an easy play for FED believers, The Fed has been at the markets back.  The key question, how do investors stay in, catch the whole move, and get out at a price above the December 31, 2012 close (1426), where the final blow-off  started?

Fortunately for investors, tops take time to evolve when the Fed is involved in trying to sustain them.  In 2000 the top in the S&P took 10 months to complete, December 1999 to September 2000 and had a 17 percent range during the topping process.  In 2007 the S&P top took 8 months to complete, May 2007 to December 2007 and had a 13 percent range in that process.  The current top probably started in March 2014 and could take as long as December to decisively complete, the range to date has been 11 percent, 1814 to 2011. If we have a range like 2000 of 17 percent and the 2011 high holds, the low during the topping out would be 1669.  If on the other hand the low holds, and the range is 17 percent,  the high would be 2122.  Given that the ranges historically could be between 13 and 17 percent in the topping process, and whether, the low or the high holds, you end up with extremes possible of 1669 and 2122 on the S&P between now and the end of the year.

No doubt the unique characteristics of the economy since the first bubble in 2000 and second bubble in 2007 have both market watchers and the FED in a quandary.  As we have said through all of the QE initiatives, deflation is the primary risk, not inflation….this due to the fact that the FED has not allowed the economy to clean out its problems and build a new solid base from which a solid recovery with strong employment could develop.  The 2003-2007 asset bubble was on the back of the non-funding of the Iraq war and an exuberant, no rules, housing initiative. The 2009-2014 asset bubble is based around  the QE backed paper chase.

It is difficult for me to see how, with the program not getting the desired effect on real employment and wages,  the Yellen FED will ever see a window where they can reduce the 4.5 trillion dollar QE.  At this juncture they are only stopping the increase.  What happens when the next crisis shows its face, increase it to 9 or 18 trillion?  The solution has always been on the fiscal side, and that is not going to happen in today’s Washington.  So I am not hopeful that a real solution is coming and why I think that the current low inflation scenario will turn into full fledged deflation over the next three years.

It will be difficult for investors to handle this coming period because the reasoning and technical decisions that have worked over the past 5 years, especially the past 2 years, will be out of touch with the new FED reality.

In the stock markets over the years, you generally find that most investors are bulls, a few are bears, and a very few catch both the up and down.  With the fact that the central bank since its inception has followed a program that supports a few percentage points up in the markets each year, the bulls on average have been the long term winners.  Of course, the date when an investor starts investing is probably the key ingredient in long term returns.  If you started investing in the year 1929, 1999 or year 2007, you had a tough act, if you started in 1934, 2003 or 2009, you had it much easier.

So what is an investor to do?  If it existed, and it probably doesn’t, a long term technical cycle program that could predict the exact turning of the cycle would be of extreme value.  In reality what everyone is left with is reliance on either a buy and hold format or a reading of the tea leaves of the fundamentals, which requires a lot of patience..

For me, and I have not always had the discipline (like the last 3 years), probably the best solution is a laddered  position sequence of technical programs with each program  investing  over a specific  time horizon. This approach allows an investor to inch into the turns when they occur.

I believe we are now in a phase of the market where a turn is developing.  We will talk more about our technical laddered position levels as they change in the coming periods.  Going into the FED meeting report today, all five of the technical position levels we watch are long.

Take a look at your stock market advisor or manager, how did she or he do between March 2000 and October 2002, and between October 2007 and March 2009? Then you can make a decision on your approach going forward.

If you are interested in following our five technical position levels on the S&P index you may sign up by sending an email to eurekaps@mc.net and asking to be enrolled.  You will receive an email from the system whenever a signal is triggered.  It is free for now.