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The Case for Cash

The wisdom of storing up 'dry powder' today
Tuesday, December 10, 2013, 4:23 PM
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Executive Summary

  • Why the next stock market decline could be in excess of 50%
  • What historic indicators of coming decline are telling us
  • The case for holding cash now
  • If the market does roll over substantially in early 2014, how long may the decline last?

If you have not yet read The Case for a Crash, available free to all readers, please click here to read it first.

In Part I, we attempted to answer the question, Which forecast is more likely to be accurate: that the Bull market in stocks will continue for years to come, or the market will swan-dive in yet another multi-year crash?

We concluded that there was little historical evidence to support the claim that the S&P 500 will extend higher for an additional three to five years.

Here in Part II, we’ll look for clues about the possible amplitude and timing of the decline that the five-year cycle of the “new normal” suggests is likely.

(A reminder on gold: I detailed a forecast on gold earlier this year based on price action around key support/resistance levels, and nothing in recent price action has caused me to amend that forecast.  I have also noted that gold does not correlate well with either stocks or the U.S. dollar; i.e., its dynamics are largely independent of stocks and the USD. To the degree that gold is viewed as a “risk-off” safe-haven asset, it should do well if “risk-on” assets such as stocks crater.)

Forecasting the Amplitude of the Next Decline

A number of technical analysts have noted this megaphone pattern in the stock market, a pattern formed by alternating higher highs and lower lows.  This is one basis of forecasts for the SPX to drop to the 500-600 level in the next downdraft, potentially retracing the entire Bull advance from 1995. 

While this megaphone may not play out, it establishes a potential target for a crushing drop from current highs...

 

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