Entering text into the input field will update the search result below

This Is Not A Bear Market

Sep. 03, 2015 4:12 PM ETUPRO, SPY
xtremers profile picture
xtremers's Blog
1 Follower
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

What Our Model States

The investment world is full of bear market predictions. The rationale behind these predictions have a similar tune.

  1. The S&P 500 is falling, so it will continue to fall.
  2. VIX has crossed $25, so the U.S. stock market is in a bear market.
  3. China is in a crisis, so the U.S. stock market will enter a bear market.

The above rationale is nonsensical.

  1. The U.S. stock market is not in a bear market just because it's falling. This is correlation, not causation.
  2. External crises do not cause U.S. bear markets. (We do not define bear markets as a decline that exceeds 20%). China's stock market was nailed from 2009 to 2013 while U.S. equities experienced a massive bull market. Exports to China account for less than 1% of U.S. GDP and only 2% of revenues for S&P 500 companies is from China. In other words, China going to hell won't really affect the U.S.

American bear markets can only be caused by two things.

  1. Fundamental problems in the U.S. economy.
  2. A U.S. stock market bubble.

The U.S. economy is very strong right now and the U.S. stock market has not reached bubble valuation yet. Hence, a bear market cannot begin.

However, our model has been predicting a significant S&P 500 correction since the end of March 2015. We define a significant correction as either a big correction or a long consolidation. After a massive rally in 2013 and 2014, the S&P should make a significant correction any day now.

S&P 500 in 2013 and 2014.

Since neither a big correction nor a long consolidation has been completed according to our model, we are still 100% cash.

Our Thoughts on the U.S. Stock Market

Please note that our thoughts are irrelevant to how we invest. We follow our model 100%.

A big correction is a more likely scenario than a long consolidation. If this is the case, then the key is to determine when this big correction began (or will begin).

  1. Many traders think that the S&P 500 will retest its lows from Monday August 24, 2015. If this retest occurs, then the S&P 500 will complete a big correction as defined by our model. This correction will have begun on May 20, 2015. We will be able to buy UPRO at a 40%+ discount from where we sold it. :)
  2. Many prominent investors like Jim Rogers believe that the stock market will make a significant correction later in the year. This means that the S&P 500 will make a new all time high before the real significant correction begins. Perhaps the trigger for this scenario is a Federal Reserve rate hike in September. Jim Rogers believes that the upcoming correction will be driven by deteriorating U.S. economic data.

Either way, our firm is sitting on the sidelines right now. If a big correction is completed in the ensuing months, we will buy back our UPRO position at a huge discount. If a long consolidation is completed, we will buy back our UPRO at a price that's close to where we sold it.

This post was taken from InvestingTrack.com's blog.

Analyst's Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in UPRO over the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You