Is a Bear Market Possible?

As silly as that headline seems to be, I have an interesting perspective that I want to share with you this weekend.

A few days ago, I had the pleasure and privilege to spend several hours with one of my Swiss-based wealth-management business partners. I find it refreshing to get a viewpoint and perspective of global and US markets from really smart, well-informed money management experts; especially when they live in a totally different part of the world.

Here are some of the highlights of that briefing:

• Quantitative Easing and massively increasing sovereign debt (the creation of an illusion that the economic condition of countries are better than they really are, through the insertion of trillions of dollars into financial entities creating a wealth bubble) is alive and well in Europe, the US (of course), Japan and to a lesser degree several other countries, including China.
• Since QE (in its various incarnations) creates an illusion of prosperity, there tends to be insufficient real fundamental economic growth. Governments and 'Central Banks' continue to paint a picture that they will discontinue the dumping of fiat money into financial markets as soon as their relative economies get 'back to normal growth'. But, markets (and by extension, economies) have developed an unhealthy and insatiable desire for all the free money. Even a hint of curtailing or cutting back the growing of national debts and QE (remember last Spring when Bernanke hinted about "tapering"), has demonstrated severe withdrawal symptoms of a rapidly falling market and the specter of rapidly rising interest rates. As such, it is unlikely QE will end soon. In fact, it is more likely QE and the growth of national debts will increase in the future.
• As long as QE and growing national debt continues on the current trajectory, the stock market will continue to move higher, creating more wealth for those of us who are in the market. Want some 'proof'? Take a look at the following chart:

  As you can see, only increasing levels of QE, push the markets higher. This chart, unfortunately, does not extend into the current year where the Bernanke talk of tapering had just the opposite effect on the market.

• The US Fed will likely not taper or reduce its Quantitative Easing, although it is suspected that the Fed will put on a 'show' of tapering some aspects of its QE program, while quietly increasing other segments that are not readily apparent to the general public.
• The worst QE offender in the world is Japan where its national debt is now more than 200% of its GDP. The USA is certainly on the same path. Our debt is now at or near 100% of GDP. See chart below that graphically shows the ratios of QE to GDP:

•  
• The consensus is all of this debt and Quantitative Easing policies will end badly… very badly, including massive moves lower in stock markets, out-of-control inflation and significant swings in interest rates.
• The good news is, all of the above leading up to the collapse, is good for stocks and good for our portfolios, even though it is, ultimately, terrible for our country and the millions and millions of people who have portfolios of bonds and mutual funds that will be decimated in the end. If you are reading this letter, then you are probably one of the few who are riding the bull market higher and higher. Our portfolios are on track to double every two years at the current rates of growth. Everyone else, who is not investing in the stock market, is being left behind; they are missing out on the growth and will be potentially hurt in the eventual collapse by not having grown their wealth sufficiently in the so-called 'good' years that we are in now.

  But, those of us who are benefiting from the stock market inflation must stay ever vigilant to that day when government debt begins to sink countries and central banks finally reach the limits of their fictitious 'balance sheets' where even they cannot buy government debt with the government's own money. That day will be the beginning of the end of the current euphoria of financial growth. I hope that day never comes… but, in my heart-of-hearts, I am all but certain that fateful day is inevitable.

How Do You Plan for the Worst?

So… here we are… if you sit on the sidelines and do nothing with your hard-earned money, you miss out on the bull market of a lifetime. But, can you really take the risk of jumping into the market with all the investable cash you have, knowing a stock market crash and subsequent bear market of a lifetime is a serious threat? Damned if you do and (potentially) damned if you don't.

Here is my strategy…

I am a long-term investor, one week at a time. At the moment, I am bullish and I see no major change in that attitude as far as I can see into the future; keeping in mind, I reserve the right to change my mind every week after I review the output from my computer programs.

I plan to stay long and bullish, weathering any minor difugalties by moving back to cash from time-to-time.

However, there will come a time when my quant-based systems tell me (and you, if you are following me) that it is time to start moving into inverse ETFs. I plan to ride the next bear market all the way down by holding a bevy of inverse ETFs (ETFs that move up in price inversely to the market moving down in price).

I call this my long/short portfolio strategy and I employ it in both my Signal Investor portfolio and my money management Sabinal Capital Investments  portfolios. The delicate part of this strategy is knowing when to make that move. The odds are high that there will not be a single market top for all market segments. The odds favor a lot of head-fakes and some segments making the turn to the bear side before others. The ONLY way to know when to make the move is to rely heavily on the data and not the talking heads. I'll begin my move from a bull strategy to a bear strategy when my systems tell me it is time. When the 'right' inverse ETFs start giving buy signals, look for my writings to convey that signal to you. We, most likely, will not hit the exact top in the current bull market, but we will be well into our inverse ETF strategy shortly (pardon the pun) thereafter.

The Bull/Bear and Oscillator Update…

Closing Thoughts…

You have heard various services say, "Making money in the stock market is easy…" as a way to convince you that you should use their particular product or service to experience how 'easy' it is. Yet, in your heart-of-hearts, you know it's not easy and it's certainly not without risk.

I'll never tell you that making money in the market is easy. I will tell you, repeatedly, that in my opinion, the only way to consistently have more winning trades than losing trades and your winning trades be larger than your losing trades, is to be disciplined, remain unemotional, follow a solid set of rules designed to react properly in any market condition, and use the best tools you can find to help do the heavy lifting of fundamental and technical analysis.

I, as you might expect, believe we have the best tools in the world for individual investors. I have written a book on how to build a solid set of rules for any market situation ("10: The Essential Rules for Beating the Market", published by Wiley & Sons and available on Amazon… hardback and on Kindle). And, just to prove my point, I manage a portfolio of real stocks with real money called, the Signal Investor portfolio. You can see every trade I've ever made in the portfolio and the results (up more than 35% year-to-date) speak for themselves.

Making money… good money… in the market is not easy, but it is certainly doable. It does take a fair amount of hard work, though. I put a lot of hard work into my management of the Signal Investor portfolio, and as a subscriber to that service, you get the benefit of that hard work in exchange for a small subscription fee. But even if I am doing the work, you really need to look at my picks as ideas and a learning experience to helping you make good money in the market. I want you to become proficient in making consistent profits in the stock market. My goal is to educate you by example. Hopefully, you will learn how to make the right trades at the right time… both for when you get into the market and when you get out.

I appreciate all of my subscribers… those that have been with me for many years and you who are new to CycleProphet and to me. Thank you all for your business. I hope you find that your subscription costs are insignificant when compared to the education you receive and the winning trades you make because of your subscription(s) to CycleProphet.