tisdag 15 juli 2014

The stock market will crash

First a few facts:

  • Nobody can accurately forecast stock market movements
  • There are however a number of people, including me, who have profited handsomely from predicting poor long term returns (which also turned into short term crashes)
  • Stock markets crash from time to time. They do so because human psychology tends to drive stocks to unsustainable highs
  • The US stock market is currently at such an unsustainable high, given all available data
  • No one still can't predict the market, me neither, but with equity valuations at historical extremes and the bull market extremely long in the tooth we are due a very long period of zero returns. That is usually resolved by re-setting the market at a lower level during a 1-2 year crash.

My track record consists of pumping IT stocks as an analyst between 1994-2000, then shorting IT stocks at a hedge fund in 2000-2003 and other stocks at the same fund in 2007-2009. The performance in many of these years earned us several awards, including one for the entire period 2000-2009.

This, however, still does not mean I can predict the market. Nevertheless it indicates my overall thinking about the stock market can be "useful" for the lack of a better word.

Just as with everything else I base my stock market research on reading and assimilating a lot of information from various sources. Some people these days would call me a perma bear but the fund returned over 500 per cent during a period of two 50% crashes and a total return of zero. I was simply being negative because the market was in a poor spot. It almost normalized in 2009 but after 5-6 years of relentless rises there are all the reasons in the world to be negative again.

To be clear, I have been seriously negatively inclined (i.e., I have been seriously wrong since summer 2012 and Draghi's "Whatever It Takes" speech) to stocks since 2012, which is when I started to privately short the Swedish stock market. I kept selling throughout that year, and only thanks to my risk averse personality I'm "only" down by 1.5m USD on that trade, and I still have more than 2m USD in short positions that I expect to start delivering in 2014.

Most of my data comes from the US financial markets but the Swedish market has historically exhibited very little tracking error with respect to US stocks. It is basically a slave market to the S&P 500.

Also: nothing here is to be interpreted as solicitation or recommendations to make investments. I simply state what I believe will happen.


The evidence:

TO BE CONTINUED...

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