Market Forecast for November 23 - December 31, 2015
November 21, 2015
Dr. Strangemarket is well aware that all market forecasts and predictions are subject to a great deal of uncertainty. (The best evidence that time travel is impossible, is that if it were possible, the time traveler could quickly and easily amass many trillions of dollars of wealth by buying and selling precise and accurate options and derivatives on every stock and every asset in the world.)
That said, nevertheless Dr. Strangemarket now has a strong conviction that the time has come to make a specific market forecast. So many indicators are coming together right now that I feel an obligation to say something publicly about it:
The August market decline was a clear signal that the 6 1/2 year bull market run was over. A big drop from the highs of 2015 after a year and a half of a shaky market -- this is a far more serious thing than the big drop in 2011 when the stock market had been rising steadily and still was not so overvalued at all.
The October rally made many market watchers, both bulls and bears, wonder if August was just a correction after all, and many expected a full recovery and new highs from there.
But the severe drop on Thursday and Friday, November 12-13, was another big warning sign that the August decline, not the October rally, marks the new predominant market trend, downward into a bear market. Yes, the market recovered in the week of November 16-20, but many technical analysts at least are still far more cautious now than they were just two weeks ago after the November 6 close.
The looming major market catalyst now is the Fed meeting and interest rate decision on December 16. Market expectations of a rate hike have now built up to the point where the Fed will feel almost obligated to do the rate hike to preserve its credibility -- unless economic and financial market events in the meantime give the Fed a strong reason not to raise rates.
Dr. Strangemarket's strong gut feeling is that something will indeed happen in the market to give the Fed the reason it needs to hold off on the rate hike yet again in December. That will almost certainly entail another major market decline such as the one we witnessed in August.
Furthermore, after the August decline and late September near re-test of the August low, yet another big drop in that direction will make many more investors and traders cautious and concerned that 1867 was not the lowest low the S&P 500 will reach. As many different technical analysis methods have been pointing out since August, the next major support level below 1867 and 1820 is all the way down at 1670-1695.
Bottom line: Dr. Strangemarket expects to see the S&P 500 below 1700 by Friday, December 11, or Monday-Tuesday, December 14-15.
Then Dr. Strangemarket expects to see a bounce, based on a combination of short covering at the 1670-1695 support level and actions and assurances by the Fed to shore up the market. Such a bounce will quickly bring the S&P 500 back up to the 1820-1920 range between December 15 and December 31.
Dr. Strangemarket repeats: all market forecasts and predictions are subject to a great deal of uncertainty. Protect yourself at all times. Good luck and be careful.
November 2, 2015 Update:
Dr. Strangemarket remains extremely bearish on the market both short-term and long-term. Yes, the October rally was a surprise, but that's why I recommended in my previous update "to maintain a large cash holding at the same time, which is always a wise idea in times of turbulent markets," and "As always, only pay premiums [on put options] that you can afford to lose in case the market unexpectedly turns in the opposite direction."
I don't believe this rally will hold, and I believe those who buy put options on SPY (the S&P 500 index fund) while the S&P 500 is temporarily back in the old trading range above 2,040 will make some amazing gains. Of course, my previous cautionary notes above still apply.
My analysis of the S&P 500/US Dollar Index ratio as a current bearish indicator appears on the Wolf Street website.
Readers can also find more of my articles on the Seeking Alpha website.
To contact me, please use this form:
Good luck and be careful,
September 28, 2015 Update:
As you surely know, financial markets finally took a downturn in late August. Now technical charts and global macro economic trends both point to the likelihood of further market declines this fall.
In this environment, the Treasury bond market which is promoted on this page should continue to do well. However, at this stage we have reached the point where shorting the stock market, whether via short selling, put options, or inverse ETFs, is likely to earn much greater profits than buying bonds. Treasury bonds have performed well in the recent market turmoil, but frankly not as well as one might expect during a stock market downturn.
Bottom line: For the medium and long term, Dr. Strangemarket still stands by the advice presented on this page and this site. But in the immediate short term -- the rest of this year and especially this next month of October -- Dr. Strangemarket now sees shorts and put options on stock indexes as the best bet. Put options are an especially attractive choice for the frugal investor, because one only has to risk a relatively small amount on the initial premium to get the potential of large gains. (Of course, it is always possible to lose the entire amount of the initial premium, and investors must be prepared for this possibility.) This allows the investor to maintain a large cash holding at the same time, which is always a wise idea in times of turbulent markets.
What to short? Frankly, pretty much everything except gold and gold mining stocks are likely to decline over the rest of this fall. Do your research and buy put options on whichever index, sector, or stock you believe is the most overvalued. As always, only pay premiums that you can afford to lose in case the market unexpectedly turns in the opposite direction.
Good luck and be careful,
Dear Wise Investor,
You know the stock market is shaky. The S&P 500 has had a great six-year run, but stock prices have gotten disconnected from the fundamentals of company balance sheets and the U.S. and global economy. You've seen the Shiller P/E ratio charts and all that, and you know the problem: too much P and too little E.
You can see that the stock market looks overdue for a severe correction, an outright bear market, or even God forbid another 2008-style crash. You know the smart move is to reduce your stock holdings and move more funds into cash, bonds, and a little gold.
So far so good. But as an ambitious investor, you want to do more. You understand the market and the economy better than the average investor, and even than the average Wall Street analyst. It's only fair that you want to find a way to profit from your insight.
You know the logical move to make in an overvalued market is to short it. But how?
The problem is, the normal ways to short the market may not work in Dr. Strangemarket's post-2008 financial world. Stock prices in this bull market have responded more to the actions of the Fed, and to the expectations of Fed actions, than they have to earnings, economic fundamentals, or anything else. Everyone and everything is stuck in a strange guessing game: The Fed is trying to guess where the economy is going, the market is trying to guess what the Fed will do, and you are trying to guess what the market will do.
All of this makes shorting stocks a complicated game that's too risky. Instead, you need a market strategy that will pay off in multiple scenarios:
A strategy that will work if the stock market falls, and also will work in numerous scenarios where stock prices don't drop.
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Yes, bonds! You know the basic rule of the market that bond prices go up when stock prices go down. That's why traditional safe portfolios hold both stocks and bonds for protection. But in the Dr. Strangemarket post-2008 financial world, bond prices also go up at the same time stocks go up! That's because both are responding to the Fed's monetary policy of keeping interest rates low and other forms of financial easing of the money supply.
Even better, U.S. Treasury bonds are a safe haven asset that investors around the world flock to in times of heightened uncertainty, risk, or crisis. Almost any major financial crisis or political crisis, anywhere in the world, will drive Treasury bond prices higher.
So, by positioning your portfolio to gain from rising bond prices, you can make big profits whether stocks go up, down, or sideways!
Most investors don't even think about Treasury bonds as an asset for making aggressive big profit moves. Treasury bonds are usually seen as safe assets that yield small but steady fixed-income payments. But in fact, that conventional view creates an opportunity for you to make big profits from bond market moves that other investors aren't expecting or even considering -- if you know the right strategy to use.
You will find the details in the Special Report: Dr. Strangemarket's #1 Winning Strategy for 2015 or: How to Stop Worrying and Love the Bonds.
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It's also true that many financial analysts believe interest rates and bond yields are due to go up, which would mean bond prices go down. They are called the "bond bears", and they are all over Wall Street. The problem with their view is, prominent bond bears have been saying "yields are too low, they have to go up" every year since 2008, and every year they are wrong. They have an outdated pre-2008 market view in a post-2008 Dr. Strangemarket world. Lower interest rates and higher bond prices are the new normal, the basis of the post-2008 U.S. financial system, and a growing global trend.
The widespread acceptance of the bond bear view also creates an opportunity for you to make big profits betting against them! Again, you just need to know the right strategy to use.
You may wonder about the volatility of the bond market these days. Yes, it's volatile, even Treasury bonds, and there are ups and downs. But Dr. Strangemarket's strategy is specifically designed to maximize your profit from the upside volatility, while minimizing the loss from the occasional downside volatility.
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