All the rage on CNBC at the moment is the great rotation… that is the concerted move from bonds back into stocks… and how that’s proof a major new bull market is beginning.
This is what idiot analysts say near the top of bull markets.
My suggestion… Dismiss it for the drivel it is.
Yes, investors have been piling into bonds for years because stocks have just gotten too volatile.
Yes, bonds are overvalued and due to correct in the next year or so.
And, yes, investors are moving back into stocks. But that’s nothing new. As we approached highs in the past, investors tried to jump onto the bandwagon for a ride. It’s what they always do… and they’re always too late! That’s why they’re called the dumb money.
But what’s critical to note here is that this move of everyday investors back into stocks is NOT the signal to follow the herd. Not only are these investors not “piling into stocks” at anywhere near the same size or rate as they did back in the 1990s… or even before the crash of 2008, but there’s no boom coming. In fact quit the opposite.
There’s another bust coming!
This move from bonds to stocks is a clear sign that this bull market is reaching its late stages. It’s a sign of desperation-driven risk-taking that can only end badly.
You see, the typical bull market lasts 39 months before a 20% plus correction occurs. For example, since its major bubble burst in late 1989, Japan has not seen a stock rally last more than five years before a major correction has burnt investors. Even the last major rally in the U.S. only lasted five years before the crash of 2008!
Let me be crystal clear about this: we are due for another stock crash and we expect it to begin between mid-2013 and early 2014 at the latest.
And it will look like this…
Our economy will slow a bit more than expected in the next few months, despite QE3. The next debt ceiling debate will rage anew. Stocks will correct 10% or so. Bond yields will fall as bonds go back up in value. And gold will soar.
Like clockwork, just when pundits think stocks are going to soar, they fall. That’s why you shouldn’t listen to short-term analysts on TV for timing stocks (or anything really).
The truth is that this current run back into stocks is likely about over, especially if the Dow retests its October 2007 all-time closing high of 14,165.
This raises a bug-bear of mine… Recent talk on CNBC has been around how the 14,000 level is a key area of psychological resistance for the index.
The number of importance is 1,580 – 1,600 on the S&P (a level we’ll likely reach around mid-year or shortly after one final rally). That is where the real resistance will hit and as we approach that level the smart money will likely rotate out of stocks while the dumb money finally pours in.
Now there’s good news and bad news to come out of all this…
The bad news (obviously) is that stocks are likely to go down to just under 600 on the S&P and 6,000 on the Dow by early 2015… and closer to 500 on the S&P and less than 5,000 on the Dow by early 2020.
It’s also possible the Fed Steps in one more time and limits the next deep economic slowdown and stock crash likely to occur between late 2013 and mid-2014. If so, maybe we only see a 20% or 30% crash by early 2015. But crash we are likely to see into 2014.
The good news is that you now know this and can take steps to protect your investments and even put on some market shorts to play the crash.
And that’s key here. Don’t follow the dumb money who listens to the pundits on CNBC and believes them.
Follow the smart money. Listen to us. That’s were financial success lies.
P.S. For more a more detailed analysis of how the Dow will reach 6,000, click here.
Ahead of the Curve with Adam O’Dell
Lance Armstrong gave arch-rival Jan Ullrich what’s now dubbed “the look” in the 2001 Tour de France.