Last Week Showed Us What A Black Swan Panic Looks Like

by: Friedrich Research

This past week had the largest recorded percentage loss for the averages, for the first trading week of any year, going back to when George Washington was President. I have been warning about the markets being overvalued for sometime now and preparing for it for years. What triggered this sell-off was actually a Black Swan event (A Black Swan event is an event in human history that was unprecedented and unexpected at the point in time that it occurred), where North Korea supposedly exploded a Hydrogen Bomb. A Hydrogen Bomb is multiple times more powerful than the bombs that were dropped on Hiroshima and Nagasaki at the end of World War II, so North Korea has definitely gotten the world's attention. What will happen next is anyone's guess, but it's not looking good based on investors' reaction.

This past Friday, we had a strong jobs report that should have made the markets go up, but instead of buying the dips, investors were selling the rips. Remember that we operate in a world and stock market where we cannot control events or how millions of investors will trade on any given day, but when the panic button was hit this week, our 79% cash position is what saved us. Why 79% in cash? Well simply because our Friedrich Algorithm is not finding much for us to buy these days. To demonstrate what I mean here are the real-time results of the Dow Jones 30 Index vs. what an investor would have seen in 2010 using the same stocks. Green means that each stock's Wall Street Price is selling below its Main Street Price and Red means just the opposite or that the stock is overvalued according to Friedrich.

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So with just using simple common sense and logic, one sees that in 2010 most of the list, according to Friedrich, was a bargain and in 2016, stocks in the Dow Jones Index above are way overvalued. Therefore, when most stocks in the Dow Jones 30 Index are overvalued, it does not take much for them to go down, but a Black Swan event like North Korea claiming to having set off a hydrogen bomb really panicked investors.

This folks is what a Black Swan Panic looks like. (Percentage loss from December 31, 2015 close)

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What happens next is anyone's guess, but it seems that if one wants to practice "Capital Appreciation through Capital Preservation," they better get busy and go through their portfolios with a fine tooth comb.