What do the years 2000, 2007 and 2014 have in common?
Some quick math reveals that they are all seven years apart. What is perhaps far more significant though is that each of these years mark all-time stock market highs.
The 2000 and 2007 peaks led to devastating stock market collapses that resulted in uninformed investors losing 30-60% of their wealth.
I believe that 2014 will also prove to be a year that average investors look back on with regret. Regret that they again failed to sell near the top and avoid the losses from the ensuing bear market.
There is a well-known saying that goes, "Fool me once, shame on you. Fool me twice, shame on me." What does one say if they get fooled a third time?
In the chart above, it's important to notice the pattern of higher highs and lower lows. With the economy far more fragile today than it was at either of the previous two peaks, I believe this pattern can be expected to continue. This would mean the S&P 500 dropping below the 2008 low of 666 for a loss of at least 64%.
Well, if stocks are dangerous, then bonds must be safe, right? I wouldn't bet on it. Bonds dropped sharply in the last financial crisis as well. Furthermore, bonds appear to have already begun their next bear market as indicated in the following two-year chart of the Vanguard Total Bond Market ETF (BND).
Fortunately, there are proven assets to protect and grow your money in a bear market. The US treasury funds, (TLT) and (ZROZ), as well as the short-selling fund (HDGE), reliably go up when the stock market goes down.
While these funds should prove very useful in the near future, I'm not positioning in any of these at this exact moment. The reason being that I don't believe US treasuries have reached their ultimate bottom for this cycle nor do I believe that the US stock market (SPY) has reached its ultimate bubble peak.
With volatility (VIX) almost doubling in the past month on a modest pullback of only 6% by the S&P, it appears that investors are over-reacting. It appears that a multi-week rally is imminent. I expect that rally will result in a double top or more likely a new all-time high this spring.
Regarding U.S. treasuries, it's encouraging to see them rally recently as stocks faltered. That said, after reaching a bubble peak less than two years ago, I expect the bear market in treasuries to continue until sentiment towards them has reached a nearly unanimous, negative consensus. This is because extremes in one direction usually result in extremes in the opposite direction before reversing. Examples of this behavior were crude oil in 2008 and the gold market more recently.
In the mean time, I expect there to be greater opportunities in the commodity and emerging market sectors in the early stages of this transition from bull to bear markets. That's what happened in early 2008 and it appears that a repeat performance is highly probable.
Besides stock and bond prices falling, there are other risks that are more real today than in previous declines. With a global trend towards bank bail-ins, pension nationalization and other asset confiscations, it's more important than ever to be prepared. I discuss these issues and solutions in my free special report, "How to Protect and Grow Your Money in 2014".
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