Financial Hurricane on the Horizon?

Photo Credit: EM_Equity by Michael Snyder on https://emergingequity.org

I usually don’t send out my client letters that I write. I am making an exception because of what I am seeing. Watching what is happening in the stock market is like watching the formation of a category 5 hurricane. The thing you have to remember about hurricanes is that one minute they can look ominous and the next minute they can fizzle out turning into a tropical storm. At the same time, if there is a category 5 hurricane forming you need to pay attention.

As I have said time and time again on the Prudent Money Radio Show, you have to pay attention to the environment. That is the only way you can judge risk.

Everything is literally in place for a big move and I don’t believe it will be a big move up. The evidence is so overwhelming that at a minimum we should see a 15% to 20% decline. One word of instruction with this blog piece. Oftentimes people don’t think that they can understand information about the market. If you just read through this piece you can get a real good idea of what I am writing about. If you have any questions, contact me below.

Let me start with something that I wrote in my last letter.

These statistics came from John Mauldin’s newsletter. The statistics show that at the minimum a decline of some sort is on the horizon. Here are the numbers – bear in mind these are about 30 days old.

It has been 116 days since we had a 5% correction. (decline)

Since 1928, the average number of days before a 5% correction occurred was 50.

We have been 210 days without a 10% correction. Since 1928, the average number of days before a 10% correction occurred was 167.

It has been 1955 days since we suffered a 20% correction. Since 1928, the average number of days before a 20% correction occurred was 635. In secular bull periods the average number of days was 1105. In secular bear periods the average number of days was 486.

Here is the concern about a multi week decline. I saw an article where a Wall Street Analyst who is never negative about anything was predicting a “nasty decline.” The blurb caught my attention because if this guy sees something negative it must be something. The article started off with some commentary and then he is quoted as saying that “he sees a nasty decline of -5%.” Seriously?  -5%?  A nasty decline in my book would be anything over -20%. This is a perfect illustration for my point.

It has been so long since this market has run into trouble that any type of decline is going to feel like a nasty decline. The media is going to over dramatize it. Thus, a -5% decline could easily turn into a much larger decline.

The Megaphone Pattern – Moment of Truth

The stock market goes up and down creating patterns. If you study these charts like myself, you are always looking for patterns especially patterns that are repeated from the past.

There are occasions where you can identify a current pattern that might have occurred decades ago. Why does the stock market move in patterns and repeat those patterns? I have no idea. Some would say it is the beauty of the market while others would call it the mystery of the market.

If you look at the chart, you will see that in the 70’s the stock market (Dow Jones) traced out a pattern that looks like a megaphone.

There are 7 points that make up the pattern. The points consist of lows and highs of the stock market. Today, we are tracing out the same pattern. However, today it is a much larger pattern. In the 70’s it was a 12-year pattern. Today, it is already 18 years and counting.  Now take a look at the current pattern.

If this is playing out again, then we are at point 5 heading for point 6. In the 70’s that drop from point 5 to point 6 was roughly a -45% decline. Today, unfortunately, it translates to a much larger decline.

Current Information About the Megaphone Pattern

Here is the newest information about the pattern. Ironically, point 5 occurred in January 1973 after hitting an all-time high. Today, if this is playing out, point 5 is at an all-time high and is also happening in January. However, there is something else that could be similar. At point 5 in the 70’s the Stock Market rose above the top of the megaphone pattern and stayed above the top of the megaphone for 43 days before it started the decline to point 6. Friday the 27th of January 2017 is the 43rd day outside of the megaphone pattern. That tells me that we are on the clock for resolution of this pattern or invalidation of this pattern.

This pattern is symbolic of a Trump Presidency. He is going to be a boom and bust president.  He has written numerous books and they are really more or less autobiographies. He teaches success by telling stories of his past and detailing out his beliefs. So, since we are in uncharted waters, I have been studying his life to get as clear as an idea what the next 4 years will be about.

If there is one thing about Trump it is consistency. He is the same as he was 10, 20 years ago.  Most politicians who reach the White House do not take risk. It is about staying elected and getting re-elected. Trump is about swinging for the fences (or walls – sorry couldn’t resist). He takes big risks. He is not afraid to fail. He is not into playing politics or being politically correct.  The events of this past weekend offer a good illustration of that point.  It is either boom or bust. I think that the same could be said for the stock market at this point.  It is either boom or bust at this point.

The only thing that will invalidate the megaphone pattern is a very strong bull market move. With the initial weeks of Trump’s Presidency shaping up as it is, I just can’t see it. However, I have been wrong before. If you have any questions of me or how you are invested, don’t hesitate to send me an email at bob@prudentmoney.com or call my office 972-386-0384.

 

Keep the Faith,

Bob

  • burt polson

    Very interesting, thanks Bob.

    • Bob Brooks

      thanks Burt

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