Many prominent market participants1 are already anticipating the crash of the US equity market and 2016 is the year which they have predicted. I have similar prediction but, being more conservative, my prediction stretched out to end 2017. There are multiple reasons for such prediction.
A quote from Jamie Dimon, the Chairman and CEO of JP Morgan, goes like this: "My daughter called me from school one day and said, 'Dad, what's a financial crisis?' And without trying to be funny, I said,'It's something that happens every five to seven years.'"
It has to do with the US Presidential elections.
During an election year, the market will usually be up (to ensure continued dominance of democrats or republicans) but the first year after the President takes over is usually a bad one. Politics as it is, it is always easier to say that the economy grew during the years of the reigning President and the reference will always be from the first year he/she took over. Thus, for the uninitiated, the maths is not so complicated and the above short paragraph is a short summary of the reason why. For people who are interested in such theory, you can read "The Only Three Questions That Count" by Ken Fisher.
The second risk that we are talking about is the unprecedented movement of the stock market since the financial crisis. One can rarely find a time in history where you don't need a ruler to know that the graph is moving in a straight line fashion. This in itself is not a risk. However, it increases the odds of at least a significant correction. Regardless of their causes, volatility has increased recently with 2 minor spikes down during the last 6 months.
VIX has also moved above 24 a few times during this period. My personal research shows that when VIX is persistently over 24 for a period of time, it is the sign of a crash.
The 3rd reason why you should be careful with your money is because the smart money has already moved to safety - Gold and Silver. Follow the smart money. And the reason why you should do it is simple. By smart money, it usually means loads of money. A huge investor doesn't not move in and out of the market without significant costs (either in terms of actual loss or reduction in profit). This means that they will enter and stay in the instrument for a reasonable period of time if simply because no one likes to lose money or leave too much money on the table.
Most of what the smart money does are not easy to hide (unless there are major news to help them move in or out) simply because of the sheer sum of money they have to move. Thus it important to learn to read the mainstream media news - either it actually helps or deter the smart money. A short example is the recent news on Stanley Drunkenmiller purchase of ABX. This news will aid him if he wants to move out of ABX because it will increase demand for the stock and he can unload them fast if he wanted to. Note that I am not saying that he did unload. This is just an example of what can happen. For people who are interested in such operation, I recommend "Reminiscenes of a Stock Operator".
So what simple strategy I can suggest for my prediction of the imminent crash?
For less passive investors:
- Buy miners as part of your portfolio.
- Start selling your financials.
- Dump your bonds (why are you still holding them anyway?)
For the more active traders:
- Buy miners (either the stock or long-dated calls)
- Sell short-term calls on the general market.
- Buy long-term puts on financials or general markets.
In closing, I want to emphasize the use of publicly available information in this article. And with proper study of the market (which means endless readings and thinking), one will be able to think in terms of general probability when placing a bet in the financial markets. Of course, be skeptical of everything you read, including this one.
Disclosure: I am/we are long HL, CDE.