Danger,
Will Robinson! Danger!
— Robot, Lost in Space
Oh, the pain, the
pain.
— Dr. Zachary
Smith, Lost in Space
We all have our favorite childhood
TV shows, and Lost in Space
was one of mine. I’m really not trying to insult your intelligence by quoting
fictional TV characters, but I do see some serious stock market danger ahead,
and the Lost in Space
robot may be more right about 2015 than the high-paid experts on Wall Street.
I hope the 320-point plunge on
Monday followed by the 130-point fall on Tuesday got your attention, because I
believe there is a lot more pain left to come.
I could list dozens of reason
why caution is in order, but here are four serious warnings signs just from
last week.
Danger Will Robinson #1:
ISM Manufacturing Index. The December
index of the US manufacturing sector came in at 55.5, below the forecast for
57.5 and the weakest reading since May. The New Orders component of the Index
dropped to the worst level in seven months.
The culprit is the strong
dollar, which hurts US exporters, and a general slowdown of the global economy.
Danger Will Robinson #2:
ISM Non-Manufacturing (Services Sector). The
December figure of 56.2 was well below the expectations of 58.0 and a big drop
from the 59.3 in November.
Moreover, the services index
has dropped three out of the last four months and saw the largest one-month
fall in six years!
Danger Will Robinson #3:
Construction spending. The Commerce Department
reported that Construction Spending fell 0.3% in November, which was (again)
below expectations of a 0.4% increase.
Danger Will Robinson #4:
Chicago PMI. The Index fell to 58.3 in
December, below the 60.0 expectation, as well as November’s 60.8. According to
the report, “The slowdown in the pace of activity exhibited since October’s
one-year high of 66.2 has been marked. It was a disappointing end to the year
with the pulse rate of our business panel slowing noticeably in December.”
The below-the-headline details
paint an even drearier picture:
- prices paid fell;
- new orders fell;
- supplier deliveries fell;
- production fell; and
- order backlogs fell.
Those four warnings signs don’t
mean that the bear market will start tomorrow morning, but the growing laundry
list of economic warnings signs combined with rough start to 2015 tells me that
you need to prepare for some stock market trouble.
There are three basic options:
Option #1: Do nothing—get
clobbered. Most people think they can
ride out bear markets. But the historical reality is that most investors,
professional and individual alike, panic and sell when the pain gets to be too
much.
Option #2: Hope for the
best, prepare for the worst. Have some
sort of defensive strategy in place. That could be some type of simple
moving-average discipline or a more complex technical analysis. At minimum, I
highly recommend the use of stop losses.
Option #3: Portfolio
insurance. Buy some portfolio insurance
with put options or inverse ETFs.
That is exactly what my Rational Bear subscribers
are doing, and I expect those bear market bets to pay off in a big, big way.
Whether it’s next week, next
month, or next year, a bear market for US stocks is coming, and you’d better
have an industrial-sized bottle of Pepto Bismol to help you stomach the pain or
have some rational, methodical strategy to protect your portfolio.
Tony Sagami
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