It’s the Second Law of Thermodynamics: Sooner or later,
everything turns to shit. That’s my phrasing, not
the Encyclopedia Britannica.
—Sally, in Woody Allen’s
Husbands and Wives (1992)
I want to know why the phrase emblazoned on Bob’s T shirt says, A quest for living must include a willingness to die!
“For me, life is about learning,” he says. “If I want to learn, I have to be willing to take risks and be my own agent. You might tell me not to buy that stock, and you might be right. But, if I like it, unless I try, I’ll never learn. Worse, if I depend on you to tell me what to do, I’ll be screwed if you’re not there the next time I want to do something.”
The dude is an extremely competent businessman/investor, and he gets no argument from me. I’ve been writing about the market for fifteen years, always careful to state that I am calling it like I see it, leaving the decision on what to do up to the reader. Fact is, everything I ever learned about anything came from my own missteps.
It would be nice if our screw-ups were small enough to be no more than flesh wounds. It’s not always that way, of course, and my view is that the mistake of remaining fully invested through the bear market dead ahead is not likely to be survivable.
Some background for why I say this: Market historian/analyst, Charles Dow, noted over a hundred years ago that great bull markets have three advancing phases with significant corrections between the first and the second phase, and then a collapse at the end of the third which wipes out most of the entire advance.
Each advance has a particular characteristic. The first is a short bounce from the extreme oversold levels at the end of the bear market that followed the previous bull. The second is longer and is accompanied by a vibrant economy that creates great prosperity for most participants. The third and final is narrower, with fewer people making economic gains. It is more speculative and requires a great deal more debt to sustain even the diminishing amount of growth at hand.
The first leg of the present bull market began in 1932. The Dow Jones Industrial Average was at 41, having crashed 89% from the 1929 high of 390. The market quadrupled in the next five years, topping at 167 in 1937. Phase two began after a correction that brought the Dow down to 91 in 1941. The second top brought the Dow up to 1,000 in 1966. That 25 year period featured the greatest economic expansion in the nation’s history. The middle class grew exponentially, as did their wealth and retirement benefits.
The ensuing correction ended in 1974. The Dow bottomed at 574. The third phase has seemed to be topping a couple of times, once in 2000, and once in 2007. But each time the reaction lead to new highs. For the third time since 1974, we appear to be making a top. It is one I wouldn’t want to ignore if I owned any stock (I don’t).
By every metric, both the fundamentals and technicals in the market are primed for the final top. I’ve noted them at length in earlier posts. New readers may want to scroll down and browse posts that are tagged “on Markets.”
The highest probability Elliott Wave forecast is for another high in the Dow Industrials before yearend. A lower probability count has the top already in. Once the market starts down, it should be in a bear market past the end of this decade. The ultimate low should wipe out most of the value in stocks.
All of nature benefits from stresses. Forest fires clear the overgrowth, setting the stage for renewal of all life in the ecosystem. Hurricanes replenish aquifers. Bear markets remove the rot in the financial system. It’s a self correcting phenomenon. Has to be, nobody invested at a top will willingly vote for it.
I want to state that I am profoundly optimistic about the future of the nation. Much of the difficulty in our culture will be resolved in the course of the general breakdown in the financial system. It will finally lead to necessary political and economic change. A cursory look at history informs us that this is the way we get better.
I just don’t see any value in investors impoverishing themselves trying to stay invested during the debacle.