Stocks are rebounding today after an ugly decline yesterday. The S&P 500 has gotten back about two-thirds of the losses in total, by the early afternoon. This is the classic mentality of buy the dip and has become common place in the last few days. After-all, average investors have been programed to buy every minor dip, no matter what...or risk missing the next up move.
While many believe 2014 will be another year of double digit gains in the stock market, I for one do not. I believe this market is setting up for an epic collapse of 30% between 2014 and 2015. Why? The three main reasons are listed below.
1. The Federal Reserve has started to make it clear that they do not believe QE (printing money) is helping the recovery anymore. Essentially they look at it like it may be hurting the economy in the long run (inflation issues). There is a mega disconnect between investors and these comments. The market still believes the Federal Reserve will not let the economy or the stock market take any sort hit. QE has been the main culprit for the epic run in the stock market over the last few years. Removal of this, leaves a drug addict without its precious drug.
2. Earnings growth has been small and mainly due to stock buybacks. In simple terms, companies have been buying back shares which increases earnings per share without actual profit growth. This can be seen as revenue numbers have remained unchanged or dropping in the last year. In recent days, constant warnings from retailers like Lululemon Athletica inc. (NASDAQ:LULU) and Sears Holdings Corp (NASDAQ:SHLD). In an economy that is supposed to be growing, this raises major concerns.
3. The cycles are aligning. First, compare the time period between the 1993-4 to the epic Dot.com collapse. Then take that same time frame and note the collapse that started in 2007. Then take that same time frame and add it to 2007 and look at what you get. You get 2014-15. This is scary as the cycle is telling us something big is on the verge. As if that was not enough, take a look at the chart of the Dow Jones Industrial Average and compare it to the Dow chart from 1928-30. They are almost identical. In 1930 the stock market took a 30%+ hit.
The bottom line is obvious and must be expressed. This market has major risks and it is wise to be on the careful side.