{"id":37068,"date":"2013-03-25T12:46:50","date_gmt":"2013-03-25T16:46:50","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=37068"},"modified":"2013-03-25T12:46:50","modified_gmt":"2013-03-25T16:46:50","slug":"the-last-time-the-market-flashed-this-signal-stocks-fell-off-a-cliff","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/03\/25\/the-last-time-the-market-flashed-this-signal-stocks-fell-off-a-cliff\/","title":{"rendered":"The Last Time the Market Flashed This Signal Stocks Fell off a Cliff"},"content":{"rendered":"

By Chris Hunter, insideinvestingdaily.com<\/a><\/strong><\/p>\n

Last week, investors got more happy news. The Fed announced it would
\nkeep printing $85 billion a month to buy Treasury and agency
\nmortgage-backed bonds.<\/p>\n

By printing money and buying bonds (aka monetizing debt<\/strong><\/a>),
\nthe Fed is going to keep shooing investors out of bonds and into
\nstocks… funding government spending… and pushing up inflation rates
\nto make outstanding debt easier to pay back.<\/p>\n

And not only that, but it’s also going to keep doing so until the
\nunemployment rate becomes “acceptable” again \u2013 in other words, as far as
\nthe eye can see. The one thing that has not responded to the Fed’s
\ncredit and cash deluge is the unemployment rate<\/strong><\/a>, which is still at 7.7%.<\/p>\n

Against this backdrop, stocks have been rallying. And the big question everyone is asking is: Should they join the party?<\/p>\n

Frankly, this is a terrible question. I can virtually guarantee that
\nif this is the way you think about investing, you’re going to have a
\nmiserable time in the markets over the long run.<\/p>\n

Here’s how my friend and legendary resource investor Rick Rule put it recently (with my own emphasis added):<\/p>\n

Speculating on the events that are
\ncertain or almost certain to occur is almost always more profitable than
\ngambling on a long shot, unlikely occurrence. Make investments based on
\nunlikely scenarios only when the potential risks and rewards are disproportionately in your own favor<\/strong> and you can afford the loss that you may incur.<\/em><\/p>\n

This is the only question that matters: Are the potential risk and rewards<\/strong><\/a> disproportionally in your favor?<\/p>\n

Usually that happens when you can buy a stock… or other investment
\nasset… at a price that is below its intrinsic value. It certainly
\ndoesn’t happen when you rush out and buy something because: (a) everyone
\nelse is buying or (b) because you think you can find a “greater fool”
\nto buy something that is already overvalued.<\/p>\n

So are the risks and rewards of following the crowd into U.S. stocks disproportionately in your favor right now?<\/p>\n

To answer that question, let me share with you an observation made by
\nbearish fund manager John Hussman recently. Then you can decide for
\nyourself.<\/p>\n

[Two weeks ago], Investors Intelligence
\nreported that the percentage of bearish investment advisors has
\ndeclined to just 18.8%. The last time bearish sentiment was below 20%,
\nat a four-year market high and a Shiller P\/E above 18 (S&P 500
\ndivided by the 10-year average of inflation-adjusted earnings \u2013 the
\npresent multiple is 23) was for two weeks in May 2007 with the S&P
\n500 at about 1,525.<\/em><\/p>\n

The next instance before that was two
\nweeks in August 1987 (bearish sentiment never dipped much below 27
\napproaching the 2000 peak except for a reading of 22.6 in April 1998,
\njust before the Asian crisis). The next instance before that was for
\nthree weeks of a five-week span in December 1972 and January 1973, which
\nwas immediately followed by a 50% market plunge.<\/em><\/p>\n

Now, I realize this isn’t the kind of analysis you’ll find on CNN
\nMoney or CNBC. But it’s vitally important because it shows you what has
\nhappened in the past when we have had the same kind of market setup we
\nhave today.<\/p>\n

Here’s a chart of what happened after the most recent instance of this same setup \u2013 in May 2007.<\/p>\n

\"S&P
\nView Larger Image<\/a><\/p>\n

I am not saying that stocks are destined to plunge again. They may or
\nthey may not. I’m simply pointing out that the kind of sentiment
\nreadings we’re seeing today mixed with the kind of valuations we’re
\nseeing today have not been a recipe for profits in the past.<\/p>\n

The risks and rewards, in other words, have NOT been disproportionately in investors’ favor.<\/p>\n

Forewarned is forearmed, as they say.<\/p>\n

Good investing,<\/p>\n

\"Chris<\/p>\n

Chris<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

By Chris Hunter, insideinvestingdaily.com Last week, investors got more happy news. The Fed announced it would keep printing $85 billion a month to buy Treasury and agency mortgage-backed bonds. By printing money and buying bonds (aka monetizing debt), the Fed is going to keep shooing investors out of bonds and into stocks… funding government spending… … <\/p>\n

Continue reading “The Last Time the Market Flashed This Signal Stocks Fell off a Cliff”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-37068","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/37068","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=37068"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/37068\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=37068"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=37068"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=37068"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}