CrossCurrents: Where's the Bear?
07/19/2016 9:00 am EST
We’ve been patiently waiting for a bear market to develop and the worst that has occurred since the May 2015 peak was a three-month decline measuring 16.2%, not quite the definition of a bear market. So, where’s the bear? asks Alan Newman, editor of CrossCurrents.
It’s been well over a year since the major indexes traded at a new high. Thus it is germane to consider that a market unable to trade at a new high for a substantial period of time is not a bull market. And if it is not a bear market, it may certainly be the lead phase to a bear.
Indeed, we continue to believe that stocks are likely poised for a very significant downside move. Liquidity, or the lack thereof, is our key.
We see extreme leverage vis-à-vis margin debt and the lowest cash-to-asset ratios in stock market history. Both liquidity measures are as strained as they have ever been in history.
The gap between record high margin debt and record low cash to assets ratios continues to widen. On the prior two times this occurred — in 2000 and 2007 — we saw stock prices cut in half.
Although we are not forecasting the exact same consequence for this phase, the possibility of another 50% collapse is significantly higher than most observers would admit.
Not only do we have an insane exposure to risk, the exposure has been sustained month after month for two-and-a-half years. This has never occurred before in stock market history.
The day after the 9/11 terror attack, we first declared our belief that a super bull market had just commenced for gold bullion and gold stocks, based on our view that gold is the currency of last resort and has acted as a safe haven for thousands of years.
Gold ran from just above $270 per ounce to as high as $1915 per ounce in August 2011. Although gold has corrected sharply in recent years, we believe our thesis remains intact.
We expect both to provide investors protection from many worst case scenarios in the years to come. We believe this approach will work regardless which major candidate is elected in November.
By Alan Newman, Editor of CrossCurrents