Preparing for a fall this Fall

“We don’t just want to survive uncertainty, just about make it. We want to survive uncertainty and, in addition–like a certain class of aggressive Roman Stoics–have the last word.”

—Nassim Taleb

Maybe you disremember, but we had a stock market mania recently. The emotional fireworks have given out, but stocks remain overpriced and overowned. This is disquieting when you consider that every mania in history ultimately fell back below the starting point. Japan’s stock market mania peaked in 1989 with the NIKKEI Average at about 40,000. It is just now, twenty-some-odd years later slipping below its beginning values of around 6,800. Takes a long time to unwind these things.

The U.S. version of the mania began in 1982. The NASDAQ was a tad over 300, and the Dow Industrials around 800. The former shot up to 5,000, while the Dow followed with a high in “07 of 15,000. Both are well below the peaks, with a lot more selling to come.

Regarding the outlook for the balance of the year, Chicken Little is sunning himself on Fire Island this week, so I’ll have to fill in for him with the market forecast: It’s gonna come a bad storm, no lie. By steadily, placidly moving up this summer, stocks have seriously lulled the crowd into complacency. The advance from the June 4 low has been corrective, not impulsive, and the underlying strength that came from the momentum oversold at the low is exhausted, leaving the market vulnerable to the next wave down, which will be a third wave of small degree, but serious enough to cause a lot of damage between now and the Fall.

This makes for an interesting call on the presidential election. Socionomics posits that social mood drives elections as well as the market, and a declining market suggests that, if the market is down into November, the incumbent will be voted out of office.

For anyone who thinks that will be a good idea, here’s the rest of the Elliott Wave forecast: a final bottom in both social mood and the markets is not expected until 2016, so if the Republican wins in November, he is likely to end up a one term president.

Observations

The socionomic theory of the relationship between presidential elections and the stock market may sound a bit like determinism, but there is no arguing with the record. When the market was down big in an election year, the incumbent was thrown out in a landslide. Tie the theory to the outlook and we have an expectation of immense political turmoil for the balance of the decade.

My approach to investing continues to be extremely conservative and to avoid holding anything other than cash until I see the market back below its starting point twenty years ago.

Nassim Taleb’s book, Antifragile, is due out this Thanksgiving. Appropriately so, given his distaste for being caught out like the unwitting turkey on that fateful day. I’ve read the galleys on parts of it. I do expect Taleb will have more ideas on how to have the last word during the tough days ahead, so I’m thinking the book will be the must read of the season.

Cheers,

Rod

No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

 

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