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A bear market for stocks ahead?

Friday, January 13, 2017 12:47
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Financial analysts continue to be enthusiastic about the Dow topping 20,000, so much so that if you watch TV enough you might think that it is given that it will happen.  But, will it?

In the seven weeks following Trump’s election, stocks climbed 11%.  Over the last few weeks, though, stocks have gone basically sideways.  Talking heads on TV say that the market is “digesting” its gains before moving higher.

Optimism rules the day, but is it optimism or “irrational exuberance?”

Jon Strebler, writing in the December 28, 2016, issue of Dow Theory Letters, lays a reasonable case that this stock market leg-up may have run out of gas.  Or, worse, may be signaling a bear market for stocks.

Strebler calls this “the year-end phenomenon,” and his classic example are the years following post-Great Depression run-up that ended in 1966.  See the chart below.

1966 market top

It was 1983 – 17 years after the 1966 top – before the Dow Industrials punched out new highs.  If stocks go sideways for say only five years – much less 17 — with a couple of nasty down years in there, there will be a big renewed interest in gold and silver.

Strebler illustrates (see chart below) three other less dramatic examples — 1983, 1993, and 1999 — where year-end run-ups have been followed by either bear markets or sideway movements.

three market tops 1.13.17

He wonders if this recent run-up is not the third leg of a classic three-leg blow off that culminates in a bear market.  See chart below.

three phases stocks 1.13.17

After eight years of rising prices, it could be.

DJIA to year 1.13.17

Is now the time to own high-priced stocks, or the time to go with undervalued assets such as gold and silver?


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