Prudent Money

Blog Topics

<-- Back To Main Blog Page
Blog
Correction or Bear Market? A Look at the S&P 500

Earlier this week I wrote about the patter that was occuring in the Dow Jones Industrial Average. How about the S&P 500? Yes this index is also in a negative pattern at the moment. The key to interpreting risk is to answer the all-important question. Are we in a correction where the market declines 10 to 20% and then recovers or are we in a bear market where the market losses over -20% over a period of time. Corrections are actually healthy for a bull market. Bear markets are of course bad for investments. As a review, the S&P 500 is in a pattern that the 5 worst bear markets have started from. That doesn’t guarantee it will happen. It just is a warning of caution.

2007 to 2009

Rather than going through all 5 bear markets, we will just take a look at the last one.

The pattern occurs where the market goes back and forth over a period of time and then starts a decline. You can see it in the above chart. The market is going back and forth between the two lines. Those two lines form a channel. Then the market falls out of the channel. This is the S&P 500. The Dow Jones Industrial average is in the same pattern as well as a 15 year megaphone pattern. You can read about that here. (ask me where to link it)

Let’s take a look at the current chart of the S&P 500. This was what happened on Monday of this week when the S&P 500 fell out of the pattern.

You can see how the S&P 500 decisively fell out of that pattern.

Let’s take a closer look at 2007.

That orange line shows how the S&P 500 fell out of that channel and then rebounded back up. This is what it looked like in a bigger picture.

Now this is what it looks like today.

It is tracing out a very similar pattern to 2007. The key is to keep a close eye on this chart. The best case scenario is that the market will recover back into that channel than rise out of it. The worst case scenario is a bear market. I will keep everyone posted in real time on this blog.

As a reminder, if you are concerned that you are not taking the right type of risk in your portfolio, I am always happy to review what you are doing. It doesn’t take very long at all. You can email me at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or call my office 972-386-0384.

 
Crash or Correction or Bear Market?

Considering what is happening in the markets, I wanted to share with you a letter that I sent out to my clients this morning.

As a review, let’s take a look at what is happening in real time. First the S&P 500. We have been watching this channel as the market has gone back and forth between the two blue lines since last November. As I stated in past letters, the S&P 500 should break out of that channel with vengeance. It has done so to the downside. Keep in mind, the last two bull markets have ended in this same pattern. 5 of 5 of the worst bear markets in history have been preceded by some variation of this pattern.

Now the Dow Jones Industrial Average

As written about, the Dow is in a 13 year megaphone pattern. You can see on the chart it is going through the same pattern as in the 70’s. We would be at point 5 if this continues to play out. Point 5 in 1973 produced a -45% decline. 1973 just like today was a Shemitah year. The reaction in point 5 is telling. Thus far, the market has started a big decline at point 5.

 

 

Crash or Correction or Bear Market?

The Dow Jones opened this morning down over a 1,000 points. Typically, when the market opens with that much loss it recovers throughout the day. The key is what happens in the afternoon. If the selling returns, it could get out of hand quickly. As I write, the market is trying to recover. Keep an eye on it.  

A normal correction in a bull market is a loss of 10 to 20%. A loss greater than 20% is a bear market. It is way too early to tell what we are dealing with. However, the following should point to caution.

  1. Psychology – Investors are not accustomed to normal losses. A 5% loss will feel like a 10% loss. The media is already blowing this way out of proportion. Investors are also more risk adverse than ever before. Year to date, investors have liquidated 78 billion dollars of mutual funds. I don’t think that today’s investor is going to stick around.

  2. Mutual Fund Cash – Mutual fund money managers have the lowest amount of cash on hand in history. Thus, if investors are selling their mutual funds, mutual fund money managers have to sell their stocks to create cash. This adds to the domino effect.

  3. Margin Debt – Investors have foolishly borrowed against their investment accounts to purchase more stocks. We have more margin debt than any time in history. AS stocks decline, brokerage companies will issue margin calls requiring investors to pay down their debt. That also adds to the selling

So, I don’t want to get too far ahead of myself forecasting what is to come. We just need to take it day by day. This first 30 days of selling will tell us a great deal. The losses in the Chinese stock market during the first 30 days were as great as the losses during the first 30 days of the 1929 US bear market crash. We are witnessing deflation playing out. It hit the gold market. Then it hit the oil market. It hit China’s stock market with a vengeance. Now it appears to be hitting our stock market. It was only a matter of time.

If the deflationary waive stays consistent, the losses in the stock market could be deep and could occur quickly defying what anyone would think could happen. Then again, we could be off to new highs before you know it. This market has been very unpredictable!

 
UPDATE: Stock Market Pattern Signaling Trouble Ahead

A few weeks ago, I wrote about a troubling pattern that has been developing over the past 13 years in the Dow Jones Industrial Average.   I wanted to give you an update. As a review, the stock market moves in patterns. On occasions, you will see these patterns repeat themselves. Below you will what is called a Megaphone Pattern. It is called that way because the pattern is in the shape of a megaphone.

You can see below, that this pattern developed over a long period between 1966 and 1976.

 

As you can see, there are 6 main points. Point 5 to point 6 is the more significant decline of the pattern. The exact same pattern is playing out today. This pattern is much bigger. Think of it in terms of the development of a hurricane. Hurricanes develop in certain patterns. The environment has to be just right for the development to occur. Some develop into big hurricanes and some fizzle out. This pattern has been developing now for 15 years.

 

Just like in the 60’s and 70’s, there have been distinctive points. Today it looks like we are at point 5. If so, point 5 to point 6 would be a very large decline. During the 70’s, the drop from point 5 to point 6 was -45%.

 

What are the signs to look for to confirm the suspicion?

 

You want to look at how the market reacts when it gets to those points. This is what it looks like at potential point 5 today.

 

The stock market will get to that point and either successfully rise above it and nullify the pattern or struggle and start a decline. Unfortunately, the latter is happening right now. This definitely bears watching. I don’t write this to over sensationalize the current weakness in the stock market. I write this so that you can get a better view of what risk looks like. At any given time, the Dow Jones could nullify this pattern and strengthen again.

 

Next week, I will be rolling out a very detailed webinar on what this looks like and how this also potentially ties into the Shemitah year. There are some very interesting similarities.

If you are concerned about the risk you are taking, I am happy to evaluate your risk level by taking this survey as well as give you an opinion on your investments.  You can either all my office at 972-386-0384 or email me at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

 

 

 

 

 
Which Method of Getting Out of Debt is Best?

By Bob Brooks

August 19, 2015

 

The Snowball method is one of the best ways of getting out of debt once and for all.  I wrote about the method in my book Deceptive Money.  It is real easy to understand.  For example, let’s say you have 4 debts of 2,500 for a total of $10,000.  Let’s say you pay $250 a month for each debt for a total payment of $1,000 per month.   The whole idea is to commit to the $1,000 payment until all debt is paid off.  So, if you pay off one of the debts before the other 3, you don’t reduce your payment from $1,000 down to $750.  You commit to the $1,000. 

Which debt do you allocate the $250 monthly payment?  Do you apply the $250 towards the smallest debt or to the debt with the highest interest rates?

A Journal of Marketing Research Study that is due to be released found that meeting small goals motivates people to reach larger goals.   Researchers conclude that the results of this research study would carry over to debt repayment strategies.  This “small victory” of paying off a smaller debt could motivate a consumer to get out of debt faster. 

On paper this makes sense.  In reality, this concept of the small victory doesn’t work very well.  First, the small victory method could end up compromising the snowball method.  One could rationalize that one of the debts is paid off and that the $250 could be spent or saved versus paying down on debt.  Second, mathematically it doesn’t make sense. A consumer gets out of debt much quicker by applying the payment to the higher interest rate.  Finally, I don’t think that a person needs this type of motivation.  They need to be able to see the plan and know ahead of time their get of debt date. 

So, if you need a little motivation, try this technique.  Set up your snowball effect and run the numbers ahead of time.  At the end of each year know what you balances need to be with each debt.  Best of all, know your debt free date.  Keeping your eye on the prize will help you stay motivated to get out of debt once and for all.

For information and live examples of how the snowball method works, check out my book Deceptive Money.  It is the step by step authority on getting out of debt the right way.  www.deceptivemoney.com

 

 
Are you taking too much risk? Find out for free

By Bob Brooks

August 17, 2015

 

I believe that understanding your financial DNA when it comes to risk is critical to long-term success with investments. In fact, I am addressing it thoroughly in my latest book that I am writing. So, I want to make you an offer.

 

In order to thoroughly research this idea of risk and financial DNA, I need real time research. So, I created a very quick questionnaire that helps identify your financial DNA when it comes to risk.

 

So, if you take a few moments to answer the survey as well as give me any feedback on questions you don't understand, I am happy to offer this as a ministry resource and send you a written analysis of your risk assessment. This will tell me your tendencies and what could influence your decision making in the future. This is especially important as we face an uncertain fall.

 

Understanding your tendencies will help you make better financial decisions.

 

Further, I will include your financial strengths and weaknesses. It is important to be aware of them. This information will also help you analyze whether or not you are taking too much risk with your retirement money.

 

From all of this research and your feedback, I can make this writing project a better resource and help further the cause of prudent stewardship.

Just go to this link and fill out the information. It won't take very long. Incidentally, the only reason we ask for your phone number is in the event we aren't able to connect with you via email.

 

CLICK HERE FOR THE QUESTIONNAIRE

 

 
<< Start < Prev 1 2 3 4 5 6 7 8 9 10 Next > End >>

Page 1 of 56