Bull Market Crash: A 2018 Correction Is Possible

Steve McDonald By Steve McDonald
Bond Strategist

Slap In The Face Award

Transcript:

Here’s your quarterly wake-up slap for those who think that what’s going on in the market is normal, that this market will go on indefinitely or that it’s different this time. And it comes compliments of what I call the GQ (the “Grill Quotient”) and data from online brokerages.

This one is a little long, but you need to hear it. So listen up!

My 30-plus years in the market don’t make me right, not all the time. No one is. But what they have done is make me pay attention when the right indicators start flashing red or green.

Back in February 2009, I told my readers to buy into the market – it was a month from the bottom – or go to Walmart and buy a good pair of boots. Because if you didn’t buy that market, you’d need the boots to kick yourself in the butt for the next 10 years.

The flashing green light then was the Troubled Asset Relief Program. It would save the banks, and that was the turning point in what was almost the end of the markets as we knew them.

I was off by less than a month on the turnaround.

This week, I had a conversation with two of my buddies at my local breakfast place – the grill part of the Grill Quotient – that convinced me we now have a flashing red.

The topic that day was the move in tech stocks. My buddies were going on and on about the huge move in the FANGs (Facebook, Amazon, Netflix and Google) and the potential still left in them.

I offered the best advice I could: “Be careful. Those have had huge moves. I wouldn’t jump on that train just now.”

In the past – before this market convinced everyone that stocks really do make money – they would have taken a step back and at least considered the advice of a person who has spent most of his adult life in the markets. But that day my input was met with a resounding, “Oh yeah, it hasn’t stopped. Has it?”

And worse, as a way of dismissing my caution, they started quoting how much they have made on their tech stocks in just the last month, as if it were an indication of what was to come.

The fact that anyone is even thinking this way about the market is a huge flashing red light. It’s called the “it’s different this time” scenario or irrational exuberance.

Both will get you to the same place… the cellar.

But perhaps the last piece of this “how much longer will this market run” puzzle is that the big online brokerages are reporting that first-time investors are lining up to open new accounts and buying into some of the riskiest investments.

In every market, the biggest and brightest flashing red is when the newbies start plowing into the market. Their motivation is the fear of missing out and pent-up demand. And they always come in at the top.

ALWAYS!

Listen to me, folks. The signs couldn’t be any more obvious. I watched this happen in the ’80s, ’90s and 2000s. All the required tickets have been punched, and it’s just a matter of the right slip, crack or something to set it off.

When any index moves up as quickly as the S&P and the Dow have in the past year, or when any industry – tech in this case – goes insane, it is not normal. It is not easy, and it is not going to continue.

I can’t say when or how much the sell-off will be, but we will have one. And you can bet your bottom dollar – which is all most folks will have left when it’s over – that it will be big, it will be hard and it will take no prisoners.

And the fact that the markets have been running north for so long without a significant interruption will make this coming sell-off that much worse. It’s been so good for so long that everyone has forgotten how bad a correction can be.

The best advice I can offer you is what my father told me back in the ’70s when the Dow had dropped to the 600s. He said, “Leave the first 20%. Leave the last 20%. Take the 60% that’s left, and never look back.”

In other words, never be the first in or the last out.

That advice has served me well for decades. I hope it does the same for you.

Be careful out there. This is getting very real!

Good investing,

Steve