How To Prepare For Another Market Face-Pounding

Authored by MN Gordon via,

“Markets make opinions,” goes the old Wall Street adage.  Indeed, this sounds like a nifty thing to say.  But what does it really mean?

Perhaps this means that after a long period of rising stocks prices otherwise intelligent people conceive of clever explanations for why the good times will carry on.  Moreover, if the market goes up for long enough, the opinions become so engrained they seek to explain why stock prices will go up forever.

After nine years of near uninterrupted stock market gains, new opinions are being offered to explain why the stock market will be bathed in sunshine indefinitely. 

For example, the late-1990s term Goldilocks is again being used to describe why the slow growth, low unemployment, economy is good for stocks.  Apparently, if an economy is not-too-cold, but not-too-hot, stocks can go up lots and lots.

What’s more, these days everything is so perfect that Goldilocks is no longer a good enough descriptor.  This was the conclusion that JPMorgan’s Jan Loeys recently reached, no doubt after peering at a 5-year S&P 500 index chart:

“We nicknamed this world ‘Better than Goldilocks’ two weeks ago.


“With global growth breaking out from its 7-year range and inflation still surprisingly down, we are graduating from a not-too-hot, not-too-cold Goldilocks world to an even better one for risk assets.  It will not last forever, but could easily last long enough, given past momentum in growth and inflation forecasts changes, to have a positive impact on all assets with risky ones outperforming.

Burnout, Sloth, and Apathy

Yet while Loey concedes stocks won’t go up forever, Jim Paulsen of Leuthold Group has a different market made opinion:

“We’ve got a fully employed economy, rising real wages.  We restarted the corporate earnings cycle.  We’ve got strong confidence among business and consumers.  The kick is we can do all of this without aggravating inflation and interest rates.  If that’s going to continue, I think the bull market could continue to forever.”

Forever, as we understand it, is a very long time.  Without question, Paulsen’s opinion has been molded by the market’s long running win streak.  Still, a forever bull market, like an endless summer, is not without its detractions.

Jay Adams, who pioneered pool skateboarding in the mid-1970s, once commented that he “was on summer vacation for 20 years.”  This, alas, turned out to be more of a curse than a blessing.  By the time Jay turned 40 year’s old he looked exhausted.  And at just 53 his heart ran out of gas.

Like an endless summer, a forever bull market is a misleading prospect.  If it charges too hard and fast it will burn itself out and suffer a quick death.  If it proceeds at a moderate pace it will lead to sloth, then apathy, while setting itself up for an even greater fall.

Stock buyers have been conditioned by years of easy gains to believe they live in a world without risk.  They’ve become complacent.  What to make of it?

How to Prepare for Another Market Face Pounding

There are certain endeavors in this world that offer little upside for their underlying risk.  For instance, taking on $100,000 in student loan debt to pay for a bachelor’s degree in art history is a losing trade.  So, too, is giving a Hells Angels biker the middle finger in return for a face pounding.

All summer long, investors have been giving risk the middle finger without consequence.  As of Monday, the S&P 500 had gone 13 consecutive days without moving more than 0.3 percent in either direction.  Based on data going back to 1927, this had never before happened.

Yesterday, however, investors received a face pounding.  The prospect of a nuclear missile exchange with North Korea overwhelmed investor complacency – or maybe it was something else, who knows?  But what we do know is that the S&P 500 dropped 1.45 percent and the NASDAQ dropped 2.13 percent.

Suddenly, something impossible happened.  Fear returned to the market for the first time since the presidential election.  Here are the particulars:

“The CBOE Volatility Index VIX, or VIX, jumped about 44 percent to 16.04.  That’s still below its historical average of around 20, but underlines an escalating sense of trepidation around global events.  At the least, it may be reflecting growing expectations a stock market that’s knocked out repeat all-time highs without much of a break may be primed for a substantial downturn.


“Thursday’s rise in the VIX represents its highest level since November 8 when it hit 18.74, and its sharpest single-session climb, also since May 17, when it jumped 46 percent, according to FactSet data.”

Perhaps, yesterday was just a minor hiccup as the market marches onward and upward.  But we wouldn’t bet on it.  The potential upside doesn’t justify the underlying risk.  At the very least, stiffen your chin, grit your teeth, and prepare for another market face pounding.


The Cooler King (not verified) bluskyes Fri, 08/11/2017 - 17:30 Permalink

"It's almost amazing, sad really, that people on a site with 'hedge' in the title are so clueless about how to play the current situation" To me, it's more AMAZING that nobody, so far, has actually answered my question in a succinct way... FFS ~ Even the supposedly hated 'GOLDMAN SACHS', sometimes, wades into the whirlpool and vomits up a 'target'. NO REPLY to my 3:21 PM question above thus far. & now (4:38PM) still no reply (but an xtra 'junk', which, NATURALLY, in some wierd universes, VALIDATES the original comment) & now (5:13PM) still no reply. "Raffie" where are you? Someone as clever as you would have thought of a reply by now... Is your browser STUCK on computing your bitcoin account balance? Instead ~ If you happen to be at TGIF, 'drinking' all your profits... well, I guess I'll understand to some degree... & now (5:28PM) & still no reply (but another JUNK, so they have that going 4 them). --- My simple question was only to ask  Raffie If I may presume to ask. What LEGAL TENDER do you plan to use to "Pay off all your debt"  

In reply to by bluskyes

Uranium Mountain Raffie Fri, 08/11/2017 - 15:43 Permalink

So here is my dilemma.  I sold my house and find myself with some available cash. I still have a car payment to make. Do I take these available USD's  and put them down on my new used car or do I buy precious metals with that available cash, hold on to the metals as the dollar continues to drop in price. Then later, sell the metal cashing in for mutiplied devalued dollars to pay off the loan thereby giving the bank devalued currency? I think this makes more sense than paying the vehicle down with a stronger dollar at this moment. What say you all about it?

In reply to by Raffie

Raffie Uranium Mountain Fri, 08/11/2017 - 18:02 Permalink

Depending how much USD you have, how much do you make at your job, how much you owe on your vehicle and the interest rate.For me I when I got laid off years ago paid my vehicle off because I could not see paying the bank $50mo for the next 4 years. Also I liked my vehicle.For PM would buy Silver Maple leafs. Monster boxes are nice (500 1oz coins) and if you need to bury the box in the ground and the box will hold up with no issues.I'd also have an account at Gemini and/or Coinbase and buy some cryptos. I'd go Litecoin for now.This all boils down to what can you do to live within your means?I am %100 debt free how I did everything. Cashed this and that out, but when the big crash comes being debt free will be one of the biggest things to be.Cashed out my 401k, took the hit and bought PM and cryptos.But, thats me............

In reply to by Uranium Mountain

Osmium Fri, 08/11/2017 - 15:21 Permalink

Jay Adams, who pioneered pool skateboarding in the mid-1970s, once commented that he “was on summer vacation for 20 years.”  This, alas, turned out to be more of a curse than a blessing.  By the time Jay turned 40 year’s old he looked exhausted.  And at just 53 his heart ran out of gas. Allen Sarlo, a lifelong friend of Adams’s who was with him in Mexico, said Adams spent Thursday surfing and went to bed complaining of chest pain. Adams, who had a history of drug trouble but had recently been sober, had a heart attack that night and died early Friday morning, Sarlo said.I think it was the drugs more than the 20 year vacation.