3 Market Scenarios for the Coming Years

There are only three scenarios that I believe we will be looking at in the coming years.

1. Up to new highs. I believe this will come but on the far longer run. Debts have to be settled, innovation has to kick in, Americans have to sacrifice before this will even get the slightest bit of chance.
2. Stuck in the middle muddle through. A perfect scenario until America gets a hold on things. New normals will be established, housing will hopefully settle, banks clean and willing to lend, new industries come alive, and regulations will be keeping the markets from bubbling up again.
3. Major major correction. If people are already depressed, can they still go lower that that? Yes and the answer is desperation. But as investors, we try to be optimists.

By clicking on the graph you will see that I put a 70% probability on the scenario that I think will most likely happen in the coming years. The question that always come to mind when I think about the markets probable path is where will the earnings come from? If the market is to push itself beyond new heights, then there's got to be earning s somewhere. There's got to be growth.

And let us not kid ourselves that the rate cuts will recharge the next bull run because it won't. It is possible but I am not optimistic enough. And if it does, people will be probably be so negative still by then. But I am optimistic enough to put only a 20% probability on major correction scenario. This is because I believe stocks have been sold so bad last year that I don't think there will be a similar selling intensity coming in the future.

All this rationalization is why I am intensely pushing for megatrend investing or investing in stocks with tailwinds using a swing trading strategy. Because I strongly feel that we will be stuck in a big range for a long time, buying megatrend stocks will be my weapon.

Timing wise, because the intensity of buying will be equal to selling, investors have to buy the pullbacks and trade the ranges. No more momentum trading. Investors have to learn to accumulate or buy when values are just right or cheap and sell on the following swing.

Comments

[conceptwizard:]

There is no way of knowing how badly impacted our dollar has become until the FED starts raising the rates and then all bets are off. This will be a tightrope walk and for someone who has never been on one it will be very challenging.

Housing and commercial real estate have to unfold much farther until a summary like this will hold water. This will have a spiralling effect on employment.

With the PE ratio of the S&P at 24 times, the odds of any sustained increase are less than 20%.

Consumer spending is still not in the retail numbers and wont ever be again for some time. This will effect corporate earnings and stunt any growth.

Sep 03 10:43 AM

[Mad Hedge F...:]

tyui. US stocks are now the most expensive they have been in seven years, and never really got cheap during the March low, just fairly valued. At least I have some good company in my views, which are also shared by David Rosenberg of Gluskin Sheff, the former economist at the late Merrill Lynch. The “faith based” rally is now discounting a GDP growth rate of 4.0%, which has a snowball’s chance in Hell of actually occurring. This is up dramatically from the 2.5% growth rate the S&P 500 was discounting when the index was at 667. The best stock market rally since 1933 added an unprecedented eight PE multiple points to stocks, and there is now more risk in the market than the 2007 peak. Underweight portfolio managers and momentum driven day traders are to blame. It’s what happened after the 1933 rally that scares me. Needless to say, stocks offer no value here. You can sign up for David’s well thought out research for free by going to his website at www.gluskinsheff.com/.

Sep 03 11:07 AM

[Larry House:]

Investors by definition are not guessers--they invest. It has been proven time and again that trading for the average person is suicide. I certainly have no problem if a person wants to do that, but the chances of success are slim. I have no idea what is going to happen over the next two months or the next five years. I do know I am interested in buying high-quality, good yielding stocks. Investors must go for quality now; traders can go after any stocks. If the whole game is going down, what chance does anyone have? What will happen to the pension plans in this country? I am not saying the market will go up because we need it to, but I don't think the market is collapsing never to rise again. I have said before, if one can't hold stocks for more than two years, they shouldn't hold them. If the investment horizon is longer than that, quality and yield stands a chance.

Sep 03 11:16 AM

[Mrek:]

So, since we are at the top of your muddle through range you have a 90% probability of a tradeable downside move from here. I would tend to agree.


On Sep 03 10:43 AM conceptwizard wrote:

> There is no way of knowing how badly impacted our dollar has become
> until the FED starts raising the rates and then all bets are off.
> This will be a tightrope walk and for someone who has never been
> on one it will be very challenging.
>
> Housing and commercial real estate have to unfold much farther until
> a summary like this will hold water. This will have a spiralling
> effect on employment.
>
> With the PE ratio of the S&P at 24 times, the odds of any sustained
> increase are less than 20%.
>
> Consumer spending is still not in the retail numbers and wont ever
> be again for some time. This will effect corporate earnings and stunt
> any growth.

Sep 03 11:17 AM

[Bryan Gomez:]

The terminology "muddle through" comes from John Mauldin.

Sep 03 11:34 AM

[LeoTheDog:]

This is an excellent point that seems to be lost on every bull. If you believe that valuations drive returns, the market is and has been (but for a short period of time earlier this year) terribly overvalued. To be a bull, it seems that you either have to believe that valuations don't matter, or that corporate profits will (at a time of tight credit) explode to the upside in the near future to bring these valuations down. I'm doubtful....


On Sep 03 11:07 AM Mad Hedge Fund Trader wrote:

> tyui. US stocks are now the most expensive they have been in seven
> years, and never really got cheap during the March low, just fairly
> valued.

Sep 03 02:26 PM

[macro -N- i...:]

Buy and hold? Two years? Are you kidding? Do you know what the phrase 'Seeking Alpha' means, or what this site is for? Investors,by definition, don't guess, that is why we sell when it is time to sell.


On Sep 03 11:16 AM Larry House wrote:

> Investors by definition are not guessers--they invest. It has been
> proven time and again that trading for the average person is suicide.
> I certainly have no problem if a person wants to do that, but the
> chances of success are slim. I have no idea what is going to happen
> over the next two months or the next five years. I do know I am interested
> in buying high-quality, good yielding stocks. Investors must go for
> quality now; traders can go after any stocks. If the whole game is
> going down, what chance does anyone have? What will happen to the
> pension plans in this country? I am not saying the market will go
> up because we need it to, but I don't think the market is collapsing
> never to rise again. I have said before, if one can't hold stocks
> for more than two years, they shouldn't hold them. If the investment
> horizon is longer than that, quality and yield stands a chance.

Sep 03 06:20 PM

[mbkelly75:]

Okay, let us see if I can make this clear. To say "This is a Bull Market" or "This is a Bear Market" is to take a snapshot of a moving, living stream and say "This is a Stream". It is a convienent way of looking at it - a nice tool - and that is ALL it is.
Many decades ago, Peter Lynch said "If you spend 13 minutes a year, trying to predict the economy, you have wasted 10 minutes".
Long-term, there is only 3 (three) possible ways for the Market (any market - stocks, forex, futures, commodities, ANY market) to move:
1) Trend - They move in the same general direction - up or down - over a period of time. (30% of the time)
2) Counter-Trend - Also known as a "Sideways Market", this is where the prices change little, but move in a range for an extended period of time. (60% of the time)
3) Breakout - Also known as a "Spike", this is where prices "break through" to new highs or lows. (10% of the time)
Now it does NOT matter what kind of trading you are doing - Day-Trading, Swing-Trading, or more long-term, or what your Time Frame is - minutes or years - the market can ONLY do ONE of these three things at any given time....This is NOT new information. It was first written about in a 1900 PHD Thesis by a French Mathemitition (Louis Jean-Baptiste Alphonse) named "The Theory of Speculation".
Once again - this works in ANY market and in ANY time frame. Most traders simply make this too hard and get confused and it costs them money!
Peter Lynch was right! The Trend REALLY is your friend. Work with what you have, change what you can, and let the rest go !!!! None of this matters in the long-term if only because you can NOT change it - go with the flow - or it can make you nuts AND cost you money.

Sep 03 09:40 PM

[Bryan Gomez:]

My three scenarios are directions the market may take in the future.

Unlike your three ways of how the market moves, mine has only two ways.

1) Magnitude - directional up or down
2) Duration - consolidation

The trend most of the time is always determined late in the game, almost always, is credited to hindsight. Along the way, there is magnitude and duration or to simplify it even further, swings.

I really don't want any predetermination of market direction affect my trading and investing. These three scenarios only sets up a road map. Combining it with fundamental analysis, at the least I know when to buy values and when to buy growth, when to increase allocation value stock and hold and when to just trade them.

There is really no hard and fast rule or rule set in stone. Strategies change over time. I just have to keep up with it.


> 1) Trend - They move in the same general direction - up or down -
> over a period of time. (30% of the time)
> 2) Counter-Trend - Also known as a "Sideways Market", this is where
> the prices change little, but move in a range for an extended period
> of time. (60% of the time)
> 3) Breakout - Also known as a "Spike", this is where prices "break

Sep 04 02:01 AM

[mbkelly75:]

I tend to be a bottom-fisher so fundamentals are essential also if only to judge when a stock is a good deal. Keeping the 3 trends in mind simply helps keep you focused on what matters - they do not pre-determine direction for me. Here is a link that puts a huge amount of information at your fingertips:
www.finviz.com/
BTW - good article - thanks for your insight into the markets. I may not agree with everything - but it is well thought out.

Sep 04 09:27 AM

[Bryan Gomez:]

i use finviz

Sep 04 10:01 PM