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Why The Next Drop Will Likely Be 30-40%

A re-awakened bear can do a lot of damage to a bubble market
Friday, October 23, 2015, 3:12 PM
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Executive Summary

  • New bear market + re-enter recession = 30-40% drop in stock prices
  • What are the chart of the best technical indicators telling us?
  • Confusion reigns during the transition from bull market to bear
  • Why volatility will reign & capital protection should be prioritized

If you have not yet read Part 1: Has The Market Trend Shifted From Bull To Bear? available free to all readers, please click here to read it first.

It’s The Global Economy, Stupid!

I believe another key question for equity investors right now is whether the recent noticeable slowing in global economic trajectory ultimately results in recession.  Why is this important?  According to the playbook of historical experience, stock market corrections that occur in non-recessionary environments tend to be shorter and less violent than corrections that take place within the context of actual economic recession.  Corrections in non-recessionary environments have been on average contained to the 10-20% range.  Corrective stock price periods associated with recession have been worse, many associated with 30-40% price declines known as “bear market” environments.

We can see exactly this in the following graph.  We are looking at the Dow Jones Global Index.  This is a composite of the top 350 companies on planet Earth.  If the fortunes of these companies do not represent and reflect the rhythm of the global economy, I do not know what does.  The blue bars marked in the chart are the periods covering last two US recessions.  US recessions that were accompanied by downturns in major developed economies globally.  As I’ve stated many a time, economies globally are....

 

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