Don't Lose Money While Waiting For Market Plunge

Includes: DIA, QQQ, SPY
by: TrimTabs

Today, my overall market strategy is to not lose money while waiting for the stock market to plunge. I have been providing unique investment research to professional investors since 1990 and, what is more, I am proud of my results. Originally a short seller, I started Liquidity TrimTabs in 1995 when I realized my shorts were no longer working because lots of corporate buying plus huge mutual fund inflows had been booming stock prices. Then, at the end of 1999 I said stocks had to crash because there was not enough cash to buy all the new shares from IPOs and option conversions that would come to market in 2000. I was a few months early. In the summer of 2002 we called the ultimate market and economic bottom. From 2004 through October 2007 we were almost continuously bullish.

In fact, we accurately predicted market direction about 80% of the months between 2000 and March 2009. In March 2009 the game changed and I missed it. I missed the fact that the Fed could trump supply and demand. By the end of the year I realized that what I had missed was that the market had been rigged by the government starting March 2009. Yes, everybody knows that now. But when I appeared on Bloomberg TV on January 19, 2010, and said the government had to be rigging the market, I was ridiculed and called a conspiracy theorist nut.

So since early 2010 through the present time, real-time data has indicated that stocks are dramatically overvalued. But during the same time frame, the Fed has been committed to avoiding a stock market collapse. Back when the Fed first started easing, I really think Bernanke was hoping that the underlying U.S. economy would grow and fill the gap between steroid enhanced stock prices and the economy.

Unfortunately that has not happened. The U.S. economy is stuck on no or low growth. Therefore, the next big stock market gains will come from being short when stock prices collapse to the level of the economy. To win at that game I had to figure out how to not lose money while waiting to profit from an impending market collapse.

Since the middle of 2011 my market directional calls tracked on a monthly basis have outperformed the market half the time and underperformed half the time. Yes, I publicly went bearish July 23, two days before Mario Draghi promised that investors will live happily ever after. So, on the one hand, my recent directional call has been wrong. On the other hand, Biderman's Market Picks model portfolio is down less than 1% from July 23. Okay, the S&P 500 is up 4%, and yes the model portfolio is underperforming. However, since the big future gains will be on downside, to me, the key is to not lose very much money while waiting.

Today there are three reasons why current real time data is so bearish when compared with stock prices. First, wages and salaries are growing nominally at 3% year over year-- and that is before inflation. After inflation, there is no growth in final demand and therefore spending. (See the August 16 Daily Edge for more.) What all this means is that very few jobs are currently being created. Second, no growth in spending means that earnings during the second half of the year are likely to disappoint. Why should companies hire more people and increase production when final demand is flat?

Third, supply and demand of stocks has turned quite bearish. Insider selling this month is at its highest level since May 2011. By the way, May 2011 was the first of three times the S&P 500 approached 1420. In addition, companies are also selling more shares than they are buying. New buybacks in August have been less than company and insider- share sales for the first time since this past May. May 2012 was the second time that the S&P 500 approached 1420. The third time was yesterday before the market turned around.

The stock market right now firmly believes that the Bernanke Put is omnipotent. One CNBC nitwit said yesterday that he believes Bernanke has the markets' back. My response to that uneducated remark? Only for a while, and certainly not forever. I have said many times there is nothing the Fed, nor the European Central Bank can do to fix the problems of not enough income and too much debt. The Black Swan destined to kill the Bernanke Put is already aloft.

One final thought. I talk about expecting a plunge in stock prices. Regardless, I remain bullish on certain stocks and ETFs and will keep buying them when they get too cheap versus value regardless of what overall stock prices do over the next few years.

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