Today, I bring you bearish news for the stock market. I am predicting a stock market crash in which the S&P 500 drops to 1500, the DJIA drops to 13,600, and gold rises to $1800 by March, 2014. The S&P 500 is currently at 1722, so a drop to 1500 would be an approximately 13% drop. The DJIA, currently at 15636 will drop 11% to 14000. Gold will increase from today's close at $1394 to $1812, a 30% increase. Although my numbers might be off, I am predicting a (minor) recession in the near future.
Here's why:
Stock Market: Stocks have been on a huge rally for the past 5 years. The stock market is at an all time high, and has been at an all time high for the past year and a half. Basic technical analysis/theory supports the saying "Whatever goes up, must come down". As stock prices keep on increasing, it becomes too expensive for many investors to buy new stock, or hold on to existing shares. Goaded on by financial advisors and analysts, Main Street and Wall Street investors take out loans in order to buy new shares (margin trading), because they see how profitable the stock market has become (it's been going higher and higher for the past two years), and want to get in on the profit before the market crashes. Essentially, investors are attempting to 'time the market', trying to squeeze the last bits of profit out of the market while it is still profitable, which is never a good idea. Once the Federal Reserve sees the unemployment rate drop (the Reserve is controlled by 'doves'), they will begin the tapering of their aggressive Quantitive Easing plan. Doves are primarily concerned with lowering the unemployment rate, and Bernanke has set a target rate in the 6%s (currently at 7.3%). The Reserve will most likely lower it's $85 billion per month plan of buying US Treasuries and Bonds to $60 billion, which will indubitably increase the interest rates. The increase in interest rates means it becomes more expensive to borrow money, so companies and consumers will stop borrowing and stop spending money, and instead start saving money. As a result, companies will make less revenue. Since companies are making less money, and interest rates are increasing, they need to begin saving money and start cutting back on current expenses by firing workers. A decrease in revenue, and massive layoffs at companies tell investors that the company is no longer profitable. If a company is no longer profitable, investors will stop investing in that company, and choose to invest in another company or financial instrument that offers higher yields. In addition, the increase in unemployment means people have less money to spend, and have an increased need to rely on government funded programs, like Welfare and Unemployment Benefits.
Many professional investors will foreshadow the decrease in revenue of companies as soon as the Federal Reserve announces their plan to taper off the QE causing an increase in interest rates. Those professional investors will then proceed to sell their stocks, and invest in gold or other commodities, which yield better returns then stocks at times of crisis. Once professional investors begin selling, everyone one else begins selling, and selling, and selling. Everyone else begins selling because if the professionals are selling, there is a reason for their selling, probably because there are better returns elsewhere. Others begin selling because they are wise and realize that it is better to leave now with some profits then wait longer and risk losing more or gaining more. The biggest group that sells is those who borrowed money (traded on margin). The investors who traded on margin essentially borrowed the stocks from stock brokers with a contract that stated they would give the stocks back, and pay interest for borrowing the stocks. As stock prices plunge, the margin traders rush to sell, because they are borrowing money they don't have (a risky gamble). If the stock value decreases, the investors have to pay the price/value difference out of their own pocket to the broker (might involve selling some assets), and pay borrowing fees on top of it. With the professional investors selling because they predict that companies will not beat revenue estimates in the future (company is no longer profitable), other investors selling because they see the professionals selling and recognize it is a good time to get out, and the margin traders selling, the stock market will definitely tumble.
The above chart illustrates the theory that there is a direct correlation between the S&P Monthly Close and Negative Credit Balance. From 1980 to August 2000, the S&P monthly close (blue line) increased about $200 billion. At the same time, the Negative Credit Balance (red) increased to about $120 billion by the end of August 2000. The S&P Monthly Close (blue line) then proceeds to decrease about $150 billion while the Negative Credit Balance (red) became Positive Credit Balance (green). The only way the Negative Credit Balance could have become positive that quickly is if the investors who borrowed stocks (margin traded) returned their shares (sold them) to the brokers; a massive stock sell off. The $150 billion decrease in the S&P Monthly Close (blue line) shows that there was a massive sell off in the stock market.
Fast forward to 2009, the S&P Monthly Close and Negative Credit Balance are both steadily increasing, just like in the year 2000. The Federal Reserve's Quantitive Easing Program was enacted in 2011 and lowered interest rates to rates between 0% and 0.25%. Because it was cheaper to borrow money, many investors borrowed money and invested them in stocks (margin trading). The sharp spikes in Negative Credit Balance and S&P 500 Monthly Closing price between 2011 and 2013 that investors were borrowing more money, and investing that money in the stock market. The graphs and data of the crash of 2000 (all time high Negative Credit Balance and S&P Monthly Close) replicate the same all time high Negative Credit Balance and S&P Monthly Close, history is essentially repeating itself, and we should prepare for the stock market bubble to burst (massive sell-off).
Overall, the huge stock market rally was not because companies were becoming very profitable and consistently beating earnings by above average amounts; it was because stocks were becoming more profitable then other financial investment instruments because of the low interest rates caused by the Federal Reserve's QE.
Update: Today Goldman Sachs (analysts Damien Courvalin and Jeffrey Currie) predicted a gold rally towards the end of this year. Wells Fargo and Deutsche Bank advised their clients that they predict a stock market crash in 2014.
Here's why:
Stock Market: Stocks have been on a huge rally for the past 5 years. The stock market is at an all time high, and has been at an all time high for the past year and a half. Basic technical analysis/theory supports the saying "Whatever goes up, must come down". As stock prices keep on increasing, it becomes too expensive for many investors to buy new stock, or hold on to existing shares. Goaded on by financial advisors and analysts, Main Street and Wall Street investors take out loans in order to buy new shares (margin trading), because they see how profitable the stock market has become (it's been going higher and higher for the past two years), and want to get in on the profit before the market crashes. Essentially, investors are attempting to 'time the market', trying to squeeze the last bits of profit out of the market while it is still profitable, which is never a good idea. Once the Federal Reserve sees the unemployment rate drop (the Reserve is controlled by 'doves'), they will begin the tapering of their aggressive Quantitive Easing plan. Doves are primarily concerned with lowering the unemployment rate, and Bernanke has set a target rate in the 6%s (currently at 7.3%). The Reserve will most likely lower it's $85 billion per month plan of buying US Treasuries and Bonds to $60 billion, which will indubitably increase the interest rates. The increase in interest rates means it becomes more expensive to borrow money, so companies and consumers will stop borrowing and stop spending money, and instead start saving money. As a result, companies will make less revenue. Since companies are making less money, and interest rates are increasing, they need to begin saving money and start cutting back on current expenses by firing workers. A decrease in revenue, and massive layoffs at companies tell investors that the company is no longer profitable. If a company is no longer profitable, investors will stop investing in that company, and choose to invest in another company or financial instrument that offers higher yields. In addition, the increase in unemployment means people have less money to spend, and have an increased need to rely on government funded programs, like Welfare and Unemployment Benefits.
Many professional investors will foreshadow the decrease in revenue of companies as soon as the Federal Reserve announces their plan to taper off the QE causing an increase in interest rates. Those professional investors will then proceed to sell their stocks, and invest in gold or other commodities, which yield better returns then stocks at times of crisis. Once professional investors begin selling, everyone one else begins selling, and selling, and selling. Everyone else begins selling because if the professionals are selling, there is a reason for their selling, probably because there are better returns elsewhere. Others begin selling because they are wise and realize that it is better to leave now with some profits then wait longer and risk losing more or gaining more. The biggest group that sells is those who borrowed money (traded on margin). The investors who traded on margin essentially borrowed the stocks from stock brokers with a contract that stated they would give the stocks back, and pay interest for borrowing the stocks. As stock prices plunge, the margin traders rush to sell, because they are borrowing money they don't have (a risky gamble). If the stock value decreases, the investors have to pay the price/value difference out of their own pocket to the broker (might involve selling some assets), and pay borrowing fees on top of it. With the professional investors selling because they predict that companies will not beat revenue estimates in the future (company is no longer profitable), other investors selling because they see the professionals selling and recognize it is a good time to get out, and the margin traders selling, the stock market will definitely tumble.
Fast forward to 2009, the S&P Monthly Close and Negative Credit Balance are both steadily increasing, just like in the year 2000. The Federal Reserve's Quantitive Easing Program was enacted in 2011 and lowered interest rates to rates between 0% and 0.25%. Because it was cheaper to borrow money, many investors borrowed money and invested them in stocks (margin trading). The sharp spikes in Negative Credit Balance and S&P 500 Monthly Closing price between 2011 and 2013 that investors were borrowing more money, and investing that money in the stock market. The graphs and data of the crash of 2000 (all time high Negative Credit Balance and S&P Monthly Close) replicate the same all time high Negative Credit Balance and S&P Monthly Close, history is essentially repeating itself, and we should prepare for the stock market bubble to burst (massive sell-off).
Overall, the huge stock market rally was not because companies were becoming very profitable and consistently beating earnings by above average amounts; it was because stocks were becoming more profitable then other financial investment instruments because of the low interest rates caused by the Federal Reserve's QE.
Update: Today Goldman Sachs (analysts Damien Courvalin and Jeffrey Currie) predicted a gold rally towards the end of this year. Wells Fargo and Deutsche Bank advised their clients that they predict a stock market crash in 2014.
This is an older post. Can you suggest me some place where I can find the latest online Intraday Stock Tips.
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