The Bear Market Of 2014-2017 Is Starting. Why, How & When (Revisited)

As markets opened up on January 2nd, 2014, everyone was excited. After all, what was not to like. In 2013 alone, the Dow Jones was in the “new” bull market and according to most people, the rally would continue for the foreseeable future. And why not. After all, the economy was doing better, the unemployment rate was going down to 6.6%, corporate earnings were growing at a good clip. The stage was set for the bull market to continue or so everyone thought.

How little did they know.  What they didn’t (and still don’t) know is that the bull market topped out just two days earlier, on December 31st, 2013 at 16,588 on the DOW (Mathematical top, the actual top will come later in the year).  Ushering in the final stage of the Cyclical Bear Market that will take us into the final 2017 bottom.

How do I know?  I specialize in highly advanced mathematical timing work that can identify turning points in both price and time.  It is rarely wrong, particularly over the long-term time frames. Please get the first two chapters of my book CLICK HERE to learn more about the timing work that I do.

This report is to explore  the Why, How & When of the subject matter at hand. Particularly, why we are about to go thought a bear market leg, where we are in the long-term cyclical structure of the bear market, how long the final bear market will last, where will the market be at the end of the cycle, when it will end and what to expect thereafter. We will look at the matter from the fundamental, technical and timed value approach to investing.

The WHY?

This is probably the easiest question to answer. However, before I can do so, we must go back a few years to understand what got us into this predicament in the first place.

The tech bubble really took off in November of 1994, culminating with a spectacular blow off and a subsequent collapse in January of 2000. With the Nasdaq collapsing close to 80% and the DOW declining to the tune of 40%, the FED’s were concerned.  The country was already in the recession, facing much worse, a deflationary depression.

The FED’s opened up the flood gates by cutting interest rates into the negative category and flooding the market with cheap money.  The money flowed into two primary areas of the economy. The stock market and the housing market. Driving up the values of both in a spectacular fashion.

By 2007 we were  in a massive speculative bubble.  In the stock market, the credit markets and in the real estate market.  Not only were we in a bubble of historic proportions, but it was not fundamentally sound. Meaning, it was brought on by massive fraud happening in the real estate sector.  Here is a good chart showing overvaluation.

Actually, what surprised a lot of people, including myself, is how long that bubble went on. Even though traditional media would like you to believe that no one saw the bubble or the subsequent collapse coming, that is nonsense. At least a dozen people I know, saw it coming. Some did so as early as 2004-05. Maybe I am hanging out with too many bears.

The 2007-2009 collapse was unavoidable. There was too much fraud, juiced up earnings and bad credit in the system. Just like there is today. When it happened, instead of fearing a deflationary depression, the FED’s where scared shitless, fearing an outright collapse of our financial system and the subsequent “Greater Depression”. Rightfully so.

They proceeded to open the flood gates one again, drowning the market in free cash/credit, providing trillions in bailout money and backstopping the collapse. A little bit later, the FED’s introduced QE to push interest rates into the negative territory while providing “growth credit” to our nearly dead economy. The money flowed mostly to….yep, you have guessed it…….financial institutions (who initiated the collapse), hedge funds and high net worth individuals. Giving them a risk free way to speculate, well, in pretty much everything.

However, such actions do come at a cost and that is where we find ourselves today. That is what you have to understand.  The environment we find ourselves in today is not a “unique economic environment” but a continuation of the disastrous policies initiated by the FED against the US Economy since the 1990s. Well, the 1987 crash and Greenspan to be exact.

Today, the US Economy is nothing more than a  giant Ponzi scheme, shuffling money around, borrowing from Peter to pay Paul. It is identical to maxing out your credit cards, then getting more cards and maxing them out again just to pay the interest on the first batch. With one primary difference.  Thus far, the US has been saved through having a reserve currency, ability to print unlimited amounts of money and most importantly, through having the confidence of foreign investors/creditors.  When the trust goes away, and it will, there will be hell to pay.

As 2014 starts we find ourselves in the biggest credit bubble in the history of mankind. It was this credit that drove the stock market recovery from the March of 2009 bottom. It was this credit that drove the housing market recovery and the recovery in corporate earnings.  It was this credit that created an illusion of economic growth and recovery.  How much credit?  Over $3 Trillion in FED printing alone over the last few years.

Yet, if you take the credit away, the underlying economy is nothing more than a giant house of cards on a very shaky foundation.  When you take the unlimited credit away or the velocity of such credit slows down, both happening now, the whole house of cards will come down. And that is precisely where we find ourselves today.

What I want you to understand without a shadow of a doubt is  this. Today’s economic environment has very little to do with reality. Everything you see, everything that you see doing well, has been driven up by credit and speculation.  Eventually, the house of credit collapses and we find ourselves in a midst of an economic disaster. Once again. Unfortunately, just like every Ponzi scheme eventually collapses, so will this  one. There is no way to avoid this now.

The HOW?

It depends who you listen to when it comes to apocalyptic views on our Economy and our financial markets.  On one extreme, we have hyperinflationist. They believe that actions by the FED will cause a hyperinflationary environment to the likes of Zimbabwe. In their view, the dollar will collapse, the gold will surge and Americans will use barrels full of $100 bills just to buy a loafs of bread in the neighborhood supermarket.

On the other side, you have deflationists. They believe the stock market, the credit market, the real estate market, …..everything will collapse, ushering in the next “Great Depression”.  According to them it would be best to accumulate cash, canned food, guns and ammo.

Who is right? No one and everyone. Let me explain. 

The massive printing and credit we have experienced over the last couple of years has, indeed, caused massive inflation. But not where you would expect. Yes, there are certain items throughout the economy like food and basic utilities that have appreciated substantially. However, their rise is not nearly enough to account for massive credit infusion and negative interest rates. So, where did all the money go?

The inflation everyone seeks and talks about went straight into various asset classes. Yes, you have guessed it right. Stocks, real estate, junk bonds, etc… Driving most to extreme overvaluation levels. Not only in the US, but worldwide.

Some analyst would argue that today’s stock market is not overpriced based on simplistic analysis such as P/E Ratios. However, such analysis misses the elephant in the room. A large portion of today’s corporate earnings have been driven by the same credit infusion. Without said credit, the real P/E ratio would be astronomical. How high?  Based on my conservative calculations, at least 2X and as high as 5X from today’s levels. Meaning the real S&P P/E ratio is somewhere between 36 and 100. Making current stock market not only expensive, but “are you fucking kidding me” expensive.

This is precisely what happened during the 2007-09 meltdown. While the pre bust P/E stood around 20 at the 2007 top, it quickly zoomed up close to 125 as soon as corporate earnings built on credit vanished into thin air. An identical situation to today’s markets.

So, how will this house of cards collapse? Will we have inflation or deflation moving forward?

I think everyone, including bulls, bears, inflationist’s and deflationists will be disappointed at the end of the day. At least based on my mathematical work.  Yes, my work shows a bear market between 2014-17, but not as extreme and not as violent as most people would anticipate. It shows a bear market most closely resembling the bear market between January 2000 and March of 2003 on the Dow Jones (not Nasdaq).

Meaning, a volatile non directional move with a general downtrend.  An extremely difficult environment for both bulls and bears to make money in. Those wishing to make money in such an environment really only have two option. Go short at the inception of the bear market move and stay short for the duration of the move. Surely, to be a unnerving experience. The other option would be to try and time the turning points while trading in and out of bull/bear legs. A skill requiring a lot of experience and know how.

Of course, there is another option that might be more suitable for those wanting to avoid the entire mess. That option is to get out now, stay in cash and pick up substantially undervalued assets at the bottom of the bear market in 2017.

The When?

NOW. Based on my mathematical timing work the bull market from March of 2009 bottom has topped out on December 31st, 2013 (Mathematical top, the actual top will come later in the year). Ushering in the last leg of the cyclical bear market leg that started in January of 2000 and taking us into the final bottom of 2017.

What kind of timing work do I use? The chart below is just one data point.

To fully understand the chart above please get and read my book Timed Value. To quickly summarize, I use 3-dimensional analysis that unifies price and time into one value in order to analyze and time the market with incredible accuracy.  For instance, the chart above show that between 1994 and 2009, a 16 year period of time, the  market exhibited only 22 points of variance. Giving us precise timing and amazing accuracy.

An analyst familiar with this type of an analysis would be able to pick out every single major turning point over the last 20 years. To the day. For example, when 2007 top was reached and confirmed an analyst working with this type of an analysis would know that the upcoming bear move would be exactly 8,137 (3-dimensional units), the angle of the move and it’s exact termination point. So, while everyone was freaking out during the collapse of 2008-09, an analyst performing this work would either be positioned to profit from the collapse or waiting on the sideline for the bottom in March of 2009.

Then, we have cycle work that I talk about in my book as well. While there are a number of important cycles operating in the stock market at any given time, the one we have to take into consideration today is the 5-year cycle. While the 5-year cycle works for both bull and bear markets, it is most easily noticed during the bull moves. For example,  1924-1929, 1932-1937, 1982-1987, 1994-2000, 2002-2007 and now 2009-2014. While these 5-year cycles are the easiest to identify, there are many more. In both bull and bear moves. Plus, such cycles are not arbitrary, meaning they do not terminate at 5 years +/- 6 months. In most cases they terminate at exactly 5 years, with very little, if any, variance.

Taking both, my mathematical and my cycle work into consideration, we can safely assume that December 31st, 2013 was indeed the top of the bull market run (Mathematical top, the actual top will come later in the year). Well, when I take a number of other things into consideration. Things that I do not discuss in this short report.

How Low Will We Go & Exactly When Will This Bear Market Start?

If you would be interested in learning when the bear market of 2014-2017 will start (to the day) and its internal composition, please CLICK HERE

CONCLUSION:

In this report we have looked at fundamental, mathematical and cycle data points.  With the fundamental case being clear cut and to the point, only a few questions remained.

When will the stock market top out and begin its bear market leg?  How violent will the decline be and how long it will take?  What will the impact on the overall economy be and how low will the market go?

It is my hope that the report above helped to answer all of the questions. The bear market of 2014-2017 will not be the one for the “record books”, but it will server its purpose. Completing the cyclical bear market that started in January of 2000 while ushering in the next bull run. Unfortunately, the next bull run is likely to be based on inflationary pressure as opposed to any sort of true fundamental recovery. More on that in one of my future reports.

If you would like to get more information and more exact forecasts (to the day), please visit us at www.investwithalex.com

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