The Four States of the Stock Market... And Where We Are Now

Stock-Markets / Stock Markets 2015 Feb 05, 2015 - 07:01 PM GMT

Dr. Steve Sjuggerud writes: Where do we stand now?

Is it time to get out of the market? Or get in?

Most people don't know...

Why? Because they have no frame of reference... They don't know how to size up today relative to any other time in the markets.

My good friend Meb Faber came up with a simple solution for you on our latest Inside True Wealth podcast...

Meb talked about the "the four states of the market" when I asked him if he was more of a "value" investor or a "momentum" investor. Here's what he said about value and momentum:

It's sort of like talking about politics or religion, right? Many people are either firmly Republican or Democrat, or Christian or Muslim or Hindu or whatever it may be. And that's the way it is with value and momentum. Most people are one of either... To be able to have both perspectives, put them in your head, and not go crazy is rare.

Meb does keep both perspectives...

If you look at a very simple example, which is the U.S. stock market, you can put it into a box with four possible states based on trend and value.

So you have the best state 1) cheap and going up. Then the next best is actually 2) expensive but still going up, which is where we are now in my mind. And then it goes to 3) cheap but going down, and the worst possible state is 4) expensive and going down.

Right now, Meb sees us in the second best of the four states of the market – expensive but still going up.

His big concern is that if the trend switches to going down, then we enter the worst state of the market – expensive and going down. Meb says:

The bad news is you could flip from one of the better states right now, which is what we're in – expensive and going up – to expensive and going down.

And so that, in my mind, I see as kind of the signal to batten down the hatches. You know, we've been in this incredible bull run six years going on, and at some point, the trend will change.

So how do you get out? Meb said:

We did a paper called "Learning to Love Investment Bubbles" that looked at the most famous bubbles in history, so everything from Japan in the '80s, to other types of bubbles, and using something just as very simple as a 200-day moving average to exit... Just to say, "you know what, I'm gonna get out at some point."

If you had sold back in 2007 when the stock market fell below the 200-day moving average, you would have gotten out near 1,500 on the stock market – and you would have missed the crash all the way down to 666. Take a look...

There's nothing magical about the 200-day average – it's just an objective measure to be able to say the uptrend is over, it's time to get out.

Right now, we're still in one of the "good" states of the market – expensive but in an uptrend. So according to Meb, it's not time to worry – yet. But that time may be coming, soon.

Good investing,

Steve

P.S. I highly recommend that you check out our FREE Inside True Wealth podcast, available right here.

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2013 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.