New Market Outlook Blog

We have redesigned and changed the platform for the Prudent Money Web-site. All blogs and writings will be located on the prudentmoney.com site. Every Monday I will write about something market or economy specific. Please note that I will not be posting anything else on this blog site.

Go check out the new blog – http://www.prudentmoney.com/Blog/

Keep the Faith

Bob

Following Your Neighbor off of a Cliff

All is OK when it comes to the stock market. Wall Street is urging you to jump in with both feet and get fully invested. The market is going to the moon. Foreclosure mess? Not a problem says the street. Unemployment? We are already use to it and not a problem. Just name the problem and you get the same answer. I guess to be fair the same could be said for anyone holding the same position as I. At some point, however, the risk tips the scale.

I would look at jumping into this market as the opportunity to run down the prosperity with your neighbor who has been making big bucks in the market. Just have one question when it comes to running after your neighbor. What if you are running down a road that eventually leads to a steep drop-off?

OK, candidly, I have not been right on this current advance at all. However, something could be occurring right now that is characteristic of how most big advances end. In the world of managed money and technical analysis it is called a “blow-off” top.

A “blow-off top” is defined as a rapid increase in price of the stock market that precedes a steep drop in price. It doesn’t always have to precede a change in direction. However, in many cases it does.

Playing blackjack, poker, etc., offers a great example of what this looks like. You get a hot-hand at the blackjack or poker table and feel like you are invincible. You are winning hand after hand. Then you start to lose a hand or two and then the trend reverses. After you know it, you have given back all that you won. The house always wins.

I think that the same applies to the market in this type of environment. Without a Plan B, (what you use when Plan A doesn’t work) most investors make money and then give it back.

Let’s look back to 2007 as a good example. Starting on 8/15/07, the market started a real nice bullish market rally (it went up). This ended October 9th, which marked a top in the stock market that, I believe, will be the highest level this stock market will see for many years to come. It went up 11% in 55 days.

Fast forward to today (as of the day this was written) – On 08/31/10, the market started a real nice bullish market rally. Thus far, it has been 53 days and the market has gone up 13%. This is not unusual by any means to see the market have such a big rally that should precede a pretty substantial market drop.

What do I mean by substantial market drop? I would say that a minimum from where we sit today would be a 26% to a 40% decline in value. Although that doesn’t even seem possible at this juncture there is plenty of evidence that would suggest that it is more than possible.

At the risk of sounding like a broken record, watch your risk levels.

Bernanke is Flawed in His Approach and Probably Very Wrong

Who am I to say that Ben Bernanke is wrong? After all, Bernanke went to Harvard and graduated with honors and his economics PHD from MIT. Then of course he has all of the political appointments and now is the Federal Reserve Chairman. There was someone else who had a list a mile long of credentials. In fact, he was the former Federal Reserve Chairman – Alan Greenspan. It is documented with a list a mile long of critical mistakes that were made in his part in blowing up one of the greatest debt bubbles of all time.

So, don’t let the credentials fool you. In short, Ben Bernanke wants to save the planet by purchasing billions of dollars of US Treasuries or said in another way, lend billions of dollars to the US to keep US debt a float. Buying a Us Treasury Bond is the equivalent of lending money to the United States. His logic? The Fed buys billions of dollars of US Treasuries, then mortgage rates will go down and interest rates on loans will do down further encouraging businesses and consumers to borrow and spend. This in turn might invigorate the economy and ease unemployment.

Let’s take a look at the main reason why this is a dangerous bet. I have many more. The problem is limited space.

Have you ever seen a kid blow a bubble as big as it will go? The child keeps blowing and blowing and the bubble gets bigger and bigger. The eyes of the child show the disbelief that the bubble hasn’t popped yet as more air is forced into the gum. Our bond market is one big juicy fruit bubble already. Let’s blow some more air into that bubble and see what happens.

By pouring billions of dollars into Tresuary bonds, prices of bonds (in theory) will continue to go up and interest rates fall. Common sense will tell you that prices of bonds are going up for no good reason. Thus they turn into the equivalent of worthless internet stocks that went up in price based on nothing material. This has the makings of a massive bubble. Riddle me this – what happens when that bubble bursts? Interest rates sky rocket. Isn’t that what he is trying to prevent in the first place?

There is also the notion that people are going to spend, spend, and spend because of low rates. If that were the case, people and companies would have already been doing it. Let’s face it, you need confidence to borrow money. I will just say two words why that isn’t going to happen – OBAMA ADMINISTRATION.

Further, how did that first round of 100′s of billions of dollars do for us? I don’t think that I need to answer that question.

The Bear Snores On

My two sons love this book that I would read to them called The Bear Snores On. The story starts out with all of the bear’s friends sneaking into his cave and throwing a party while the bear “snores on.” They would do something outrageous and the author would note and the bear snores on. They would pop popcorn and sing and dance and the bear snores on. Everything is great until the angry bear wakes up.

Well, our bear on Wall Street took a nap back in March 2009. He briefly started to wake up April of this year. Since then, our bear has been in and out of sleep as everyone has been partying in the bear cave.

The unemployment numbers showed continued losses of 95,000 jobs last month…and the bear snores on.

Countries are saber rattling about a currency war…and the bear snores on.

The foreclosure process is in crisis as it has been halted in states all over the country…and the bear snores on.

Middle and lower America continue to face personal financial crisis…and the bear snores on.

The politicians have an agenda so big and it doesn’t include real recovery…and the bear snores on.

The Fed prints money, continues to accumulate at alarming levels, and there is talk about a second stimulus package…and the bear snores on.

Healthcare…and the bear snores on.

Higher tax rates next year…and the bear snores on.

An investor community oblivious to the risks in the structure of our economy system…and the bear snores on.

The problem is that the bear will not hibernate forever. My guess is that he will wake up in a very bad mood considering everything that has happened in his cave. You see, I don’t think that we ever left his bear cave as investors. He has just been asleep. Yes, I know, I have been talking about this risk with nothing materializing and the market continuing to go up. However, keep one thing in mind:

In the book The Bear Snores On, it was a small spark from a fire that woke him up. It wasn’t the big events happening all around him. It wasn’t the loud music or the dancing that woke him up. All it takes is the smallest problem to surface and the house of cards will come tumbling down. As an investor, what is your Plan B?

Is a Big September a Good Omen for the Stock Market?

You have probably read that September’s performance, after having a horrid August, was the second best on record for the Dow Jones. The bulls are running hard with this headline as means to spur optimism. They want you and all of your money invested. It is the good times again and we have momentum in our sails. Well, I went back and did a little research. Dating back to 1929, there have only been 4 instances where the stock market has increased greater than 5% in the month of September.

1939 = 13.47% record – occurred during a long-term bear market
2010 = 7.7% – occurred during a long-term bear market
1954 = 7.36%- occurred during a long-term bull market
1973 = 6.7% – occurred during a long-term bear market

1939 and 1973 were both years that were caught up in a long-term bear markets. What is a long-term bear market? It is a long period of time (usually on average of 15 to 20 years) where the market goes either down or nowhere at all. I would suggest that we started a long-term bear market in January 2000.

You can contrast long-term bear markets with a long-term bull market where the market goes up over a long period of time. Said another way, they both represent long period of times where it is either good or bad for investors.

Following those big September months, the following occurred:

September 1939 – The Dow Jones made a top in that month and proceeded to decline -40% into a bottom April 1942.

September 1973 – The Dow Jones saw a top the following October and proceeded to decline -36% to a bottom in December 1974.

The only exception to the rule was in 1954 which was in the middle of a long-term bull market. It continued to increase in value.

With everyone pulling out the party hats, as an investor, you might want to start looking for the valet ticket. The police are on the way and this party might just be getting ready to get busted up.

What Mutual Fund Managers and Their Levels of Cash are Warning

When mutual fund managers are very positive on the market, historically they have kept lower levels of cash on hand in their portfolios. Watching these levels has been a very good predictor of where the stock market might be heading. Consider these statistics that date back to 1961.

Throughout the 60’s, mutual funds held on average 5 to 6% of their portfolios in cash. In some instances, it was as high as 9% to 10%. Cash levels of 4% or lower was a precursor to a market decline. In other words, when mutual fund managers held around 4% of cash, it was a signal that the stock market was about to go into a bear market or at least go through some type of a decline.

The following is from a newsletter I wrote to my clients back in 2007 right before the start of the greatest bear market since the Great Depression.

In 1971, these cash levels went as low as 4% and a -9% decline followed.
In 1972, these cash levels went as low as 3.9% and a -42% decline followed.

Then the cash levels went back up to the average of 8 to 10% again for a very long time until April 98. At that point they went back under 5% for the first time in 21 years. Following that dip down to 4.8% of cash, the market dropped -19%.

Then between 1998 and March 2000, the cash levels stayed in the mid to upper 4% ranges. March 2000, saw the first dip down to 4% cash level in almost 30 years. Of course, that occurred at the top of the great bull market run that led to a -47% decline in the stock market.

In September 2005, we set another record low in cash levels of 3.8%. That led to a mild decline of -5.2%.

In March 2007, we are now at a new record of 3.7%. Does that mean we have a bear market in our future? History would suggest that we have some type of stock market trouble in our near future. The irony is that we are at an all-time in the Dow just like we were in March of 2000.

Fast Forward to Today

So, wonder where we are today? We are currently at a record low level of cash in mutual funds at 3.6%.

NEW BULL MARKETS DON’T START UNTIL CASH LEVELS IN MUTUAL FUNDS ARE CLOSER TO 10%.

That is not an opinion. That is what history has shown. With that said, I would be careful with the risk that you are taking. Things can change very quickly.

Is the Recession Really Over?

So do you think that we are still in a recession? According to the agency that dates the starting and ending of recessions, it has been over for a long time. The National Bureau of Economic Research stated today that the recession that began in December 2007 actually ended June 2009. It has been referred to as the Great Recession because it is the longest recession (18 months) since the Great Depression (43 months).

So great! The NBER states we are out of the woods. Let me ask you a question – Is the recession over in your world? Do you feel better off than you did over a year ago? Keep this in mind when it comes to economic numbers – numbers can be manipulated and interpreted in many different ways. It is very easy to misrepresent with numbers – just remember what the government does with the unemployment report each month as a case in point.

Statistically you could say we are not in a recession. However, ask the people who have been laid off, facing or faced foreclosure, dealing with over-indebtedness, etc. if the recession is over in their lives. Statistics say one thing and reality says another. At the end of the day, I don’t think that the Great Recession of 2007 is going to get the press it deserves.

However, these favorable statistics do make for good political sound bites.

State of the Stock Market

I would state that this is an important week for the stock market. The market has bounced back nicely in September and is at a 4 month high. Further, it has also risen past some key levels. However, it also has done so on very light volume which is not the sign of a healthy market. If the market starts a significant decline from these levels, I would not automatically assume it is just a pullback. I would take it seriously.

The Challenges of an Abnormal Economic Cycle

Why hasn’t the economy recovered? Why are there still issues? This week I want to give you an economics lesson. If you can get an understanding of economic cycles, you can get a sense of where we are today.

We can get some insight by taking a look at how a normal economic cycle works. A normal economic cycle goes through 5 stages. The economic cycle starts at the bottom with a recession. Then you start a recovery that leads to a period of prosperity. When the period of prosperity hits a peak, a period of contraction occurs. During contraction, the prosperity period (economic growth) starts to slow down. If the contraction is severe then the slow down becomes economic loss. Economic loss leads to the next stage – recession. The recession acts as a detoxification period. The Government intervenes and then the recovery starts again which leads to a period of prosperity. The economy has been doing it that way for decades.

During a normal economic cycle, the government is effective in providing solutions. The government can intervene, fix things, and shorten the time it takes to get back to economic growth. In order words, the problems that created the recession can be easily fixed.

If we are not in a normal cycle, the cycle has grown much larger, meaning that it takes longer to move from stage to stage. This type of economic cycle is full of structural problems. For instance, the debt feuled prosperity period for this economic cycle was much larger and because of that the downturn is much larger. If that circle gets pushed far enough out, then the economic cycle could result in a much worse scenario like a depression or hyper inflation. It is an economic cycle that has gotten out of balance.

When you get into an abnormal economic cycle, you find the economy has structural problems. Said another way, it is the structural problems that create the abnormal economic cycle. With our current scenario, an irony exists. The very thing that created the growth in our country is the very thing that is creating the problem – DEBT. We were fueled and are being destroyed by the same thing. That creates more and more structural problems. A debt fueled recession or worse is the toughest thing to fix because in an abnormal economic cycle the Government cannot just fix things. They are ineffective as we have witnessed over the past few years.

The problem is only fixed through the destruction of debt. Either the debt is paid back or someone takes a loss. Since the government refuses to allow this to happen, the circle gets bigger and bigger pushing real recovery off into the future.

What the Unemployment Number is Not Telling You

The jobs number came out on Friday and the market loved it. The Saturday Edition of the Wall Street Journal proclaimed:

Jobs Data Provide Hope

I have always been a little gun-shy about the word “hope” given its link to our commander-in-chief. I honestly think that the markets are a joke sometimes. The market celebrated that 67,000 private-sector jobs were added last month. Of course, the total number of jobs for the month of August showed a loss of 54,000 jobs. Then there is my favorite number of all – the birth/death ratio.

This is the number of jobs that they “estimate” were created or were lost. I wonder what the jobs number looks like if you take out the 115,000 jobs that were created out of thin air? That is how many jobs they added back into the total. Now it wouldn’t be any fun if we didn’t look at how many jobs the Government estimated were created in the leisure and hospitality sector. After all, Americans have so much money to spend on these types of things. These companies must be hiring like crazy. (Please note the sarcasm.)

This past month 23,000 jobs were added to the leisure and hospitality sector. Thus far this year, the birth/death formula has added 421,000 jobs to the numbers. Of those, 78% were in the leisure and hospitality sector. I seriously cannot make this stuff up.

Are you starting to see what a joke Government accounting is? Let’s switch over to what Barron’s wrote this weekend about the jobs numbers and you will see a much more dire situation. From the article:

• All of the employment gains were part-time—full-time employment, according to the Household Survey, plunged 254,000.

• Those working part-time did so pretty much because they had no choice, and their numbers surged by 331,000—the biggest increase in six months.

• Of the 67,000 rise in private-sector jobs, 10,000 reflected returning construction workers who had been on strike.

• The 27,000 shrinkage in manufacturing slots and flat total goods-producing employment are hardly evidence of a vibrant economy.

I don’t need to tell you that this is a serious problem that isn’t getting the attention of the truth. It is just a bunch of politicians crunching numbers to create the fantasy and illusion that serves them best.

Needless to say, risk is very high in the markets. This is especially the case as we enter into the Bear’s favorite month of September.

Between a Rock and a Hard Place

What is that sound that investors heard on Friday? It is kind of faint. Oh it is the Federal Reserve Board Chairman Ben Bernanke screaming as loud as he can between that rock and a hard place. I am starting to find that this is all one big joke…that is this thing called investing.

Let’s back track for a moment. Things were as bad a few weeks ago as they are today when Ben Bernanke had his chance to rescue the market by stating the Federal Reserve Board would intervene following the Federal Reserve Board meeting. He should have known that his silence would be deafening and the market would react negatively. Well, guess what, the market did react quite negatively.

The market or drug addict was upset at not receiving assurance that the dealer was going to come through with some more stimulus or drugs. Then Bernanke sees what a tough time the market is having and at his speech at Jackson Hole last Friday he states that he has a lot of actions that they can pull out of the bag to help the economy.

In other words, he didn’t say the right things then so now he is telling the market what it wants to hear. Wall Street, who really wants to drink the kool-aid, puts in an impressive rally on Friday because Big Ben says he is going to save the day. “Don’t worry (wink, wink) I got this one,” says the Fed Chief.

Let’s take a look at what is really going on here. Further actions taken by the Federal Reserve Board will result in one of two scenarios. They wll either add another band-aid to the festering wound they call the economy or they will fix the economy.

For all of those who are bullish on Bernanke, you might want to consider something. They have already pulled out all of the stops and it didn’t work. Further, since the normal routine chemo didn’t kill the cancer we call the debt crisis, then they are just left to try experimental drugs.

The probabilities of them fixing the problem are so very low. This is a sign of desperation. Bernanke is like everyone else in Washington. Just tell them what they want to hear and keep back pedalling and hope that no one realizes that there are no good options with the exception of one.

Let the economy fix itself. Let bad investments go bad. Take it off life support and let it fight through the pain and recover on its own. As we can continue to push that reality off into the future, we are just making the problem worse.

Market Outlook

On the one hand, the contrarian in me doesn’t like the fact that everyone is so negative at the same time. That is typically a contrarian indicator. When everyone thinks that everything is either good or bad, things are about to change and go the other way. That is typically how it goes. On the other hand, maybe things are just this bad and it has never been so obvious. Monitor risk because I believe the probability is high that we did indeed start part III of the bear market back in April.

The Problem Lurking Under the Surface

It isn’t hard to put a list together outlining the challenges that this country faces. Probably my top 3 on a list would be unemployment and the government’s inability to do anything about it, the trillions of dollars worth of debt not just here but all over the world, and then the foreclosure crisis.

What isn’t getting much attention is the problem that is lurking under the surface. It is also the one issue we want to keep under control. So far, the government had been able to manipulate interest rates to the point where they have been kept under control.

The picture above shows the 10 year treasury interest rate between 1962 and today. You can see how rates went real high during the 60′s and 70′s. Then in 1980, interest rates started to fall. For 30 years interest rates have fallen. In 2008, they hit the lowest level. As of late, it looks like rates could be heading back down to those levels. Currently, we are 20% above those low interest rate levels in 2008. Since April 10th of this year, the 10 year treasury rate has fallen -32%.

Remember that interest rates and the prices of bonds move in opposite directions. While interest rates are falling, bond prices are rising.

As I wrote in this article, my concern is that we have a huge bond bubble forming. A bubble occurs when everyone invests into some sort of investment because collectively they think that this is the best place to be. In this type of environment, investors just cannot get enough. They do it in such a large way that the price of the investment gets way out of line with its true value. At some point, the bubble bursts and prices come back down to their real value. Just think about what has happened to the prices of real estate after the real estate bubble popped.

Here are a few bubble facts for you:

Last year, 375 billion dollars was invested in bond funds. Between 1998 and 2008, 425 billion was invested in bond funds. In one year investors poured almost as much money in bond funds as they did the prior 10 years.

Last Friday, the Wall Street Journal reported that companies are on pace to have a record year in issuing junk bonds. Investors are flocking to the riskiest bonds issued because they can get higher interest rates or yields.

It looks like we are experiencing bond fever on Wall Street. The problem is that if the bubble bursts, then that means interest rates will soar. Soaring interest rates is the last thing that we need in a world plagued with debt. The Federal Reserve Board knows that and because of that fact have done everything humanly possible to manipulate the prices of government bonds. Let’s just hope that this grand experiment works.

Inflation versus Deflation

This has been an interesting debate to watch.  Until about a few months ago, inflation was the “in” thing.  The notion has been that since the Government has been printing money and flooding the economy with stimulus inflation would be created. 

My stance has been all along that we will not see inflation for a long time for a few important reasons.  First deflation is often the result of too much debt in the system.  Second, the government can print all the money it wants and not create inflation because the money that is printed is going to absorb losses in the system.  The key is that money is not circulating. 

If you introduce money into the economy and that money circulates through buying and selling of goods and services and is being lent out, you can definitely create inflation.  That is not happening.  That circulation of money is measured by the velocity of money.  If money is circulating at a high rate, we have expanding velocity.  Today we have been watching velocity contract instead of expand.  As the losses on debt continue to mount, it will be tough to expand the velocity of money.  We are on the toxic path of debt.

All of the sudden, it is as if economists are starting to recognize deflation.  Now the “in” word is deflation and not inflation.

Consider the definition of deflation.  Deflation is a decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. (Source: Wikipedia)

This is pretty much what we are seeing.   Ironically, during a period of deflation, the dollar is actually strong and gold weakens.  We are also seeing that trend. 

The Federal Reserve Board is now acknowledging we might have a deflationary problem.  Ben Bernanke is regarded as an expert on deflation.  Expert or not, it is happening on his watch. Inflation is something the Federal Reserve Board can tackle head on.  Think of deflation as aggressive cancer whose only cure is experimental medicine. 

This last Federal Reserve Board meeting illustrates how they are shooting in the dark.  In fact, some economists fear that these new steps they are taking could actually backfire and make the situation worse.

Even more amazing is that we could pump 100’s of billions of dollars into the system and almost 2 years later have the same problems on a much larger scale.  As I have said many times before, the politicians and the Federal Reserve Board are useless in this scenario. 

The only solution to our economic mess is letting the system detoxify on its own allowing consumers and businesses to work through it.  In that process you stop creating more debt and allow the losses to occur.  You support small business in an attempt to rebuild what has been destroyed. 

Unfortunately, we are getting the exact opposite out of Washington.

No Soup Lines….yet

Not only does the jobs report released last Friday give us a real dose of reality, it also puts an emphasis on the importance of November’s vote to get rid of the socialists that continue to do nothing to help those that are unemployed beyond keeping them on the Government dole through unemployment benefits.   Let’s look at the numbers.

The jobs report showed a loss of 131,000 jobs this past month. Some of that loss is to be expected due to the laying off of census worker jobs that were temporary and never should have been counted in the first place.  Then the Department of Labor went back to June’s numbers and said that those numbers were not quite right.  They stated that June’s unemployment number was actually an additional 100,000 loss in jobs. 

The private sector jobs are the most important.  We couldn’t care less how many jobs the Government is creating.  When we start relying on the Government to create jobs we have a real problem.   There were only 71,000 private sector jobs created which was much less than expected.   The irony is that, in a sense, some of those jobs are government created as well.  Barron’s reported, over the weekend, that the bulk of those jobs “reflect the fact that the auto makers didn’t shut down as they usually do in July to change models.” 

I guess the auto industry, a large majority of whom the government controls, is too busy building those $41,000 electric cars that go 40 miles on a single charge.    So, are those really private sector jobs when the Government owns so much of the auto industry?  

There are a few charts that I would love to share with you if I could get them to load. One chart shows the drop off in employment this go around.  It is the steepest drop since the 30′s.  Then there is the chart that shows private sector jobs revealing an even steeper drop.   Said in another way, this is the worst job situation that we have had since the days of soup lines and the great depression.

So, what is the solution?  I am sure that we will see Ben Bernanke dig in his magic bag of tricks and pull out some more stimuli.  Sorry to be so pessimistic… I don’t know that it matters nor does it fix the problem.   Small Businesses and corporations are not hiring because they don’t trust the White House and this march towards a socialistic state.  If the Obama administration and the rest of the politicians would start supporting capitalism, companies would begin to find that sense of confidence.      What are the chances of that happening?

The reality is that we should be creating 300,000 plus jobs each month.  Said in another way, we need to be creating that many jobs just to start a real recovery.

Don’t Get Too Comfortable

Don’t get to comfortable just yet. There is a battle raging between the bulls and the bears that is far from over. It is a high stakes battle. If you look at the chart of the S&P 500, the bears were in control January and most of February. The bulls took over from February until mid April. Then the bears took over between April and June. Since then, the bulls have been in control. Is that about to change?

Well, let’s look at where we are in the calendar year. August through October has proven to be a dicey time for the market. The decline that preceded the October 1987 stock market crash began in August. The meltdown in 1998 actually started the last part of July and then ended in October. The decline that turned into the huge financial crisis drop started in August 2008. Finally, the 2000 bear market right after a September 1st high.

Then you have another interesting pattern that can be found during the tenth years of decades. Tenth years have the worst record within the Decennial Cycle and 2010 is a midterm election year, which has the second worst record of the 4 year presidential election cycle. Of the last 12 occurrences dating back to 1890, the stock market lost money 8 out of 12 times during the 10th year. The average loss has been -7.2%.

Year	% Gain or Loss	Year	% Gain or Loss	Year	% Gain or Loss
1890	-14.10	1940	-12.70	1980	+14.90
1900	+7.00	1950	+17.60	1990	-4.30
1910	-17.09	1960	-9.30	2000	-6.20
1920	-32.90	1970	+4.80	2010	???
1930	-33.80

 

If the conditions outside are ripe for a severe thunderstorm, would you take an umbrella or just assume the weather forecasters are wrong? The conditions of risk are very high right now. We are in the time period that carries the same amount of risk as does hurricane season for the folks living on the coast. Maybe nothing happens and all of the taking heads on Wall Street are right. At the same time, it pays to be prepared by always having an exit strategy.

A Statistic that Signals a Possible Rough Second Part of the Year

If you take a look at historical statistics, they can become good predictors of probability. I like to look at the stock market in terms of probabilities rather than mask of certainty that a prediction yields. S&P equity research came out with an interesting statistic that signals a high probability that the second half of the year is going to be a rough one for the stock market.

Before diving into the data, let's take a look at one statistic first. January carries significance to it as far as performance. In my April 12th report, I wrote this about the January indicator.

The old saying goes “so goes January so goes the rest of the year.” During the last 59 years, January has had a negative return 23 times. If you will recall, we had a negative January this year. Of those years where there was a negative January, 56% of the time the stock market produced a negative result for the year.

What happens when you get a negative January and a negative result for the first half of the year? Well, from 1900 to 2009 this has occurred 26 times. Of those 26 times, the stock market ended negative the year with a lost 77% of the time or 20 our of 26 years. The average loss was -11.7%.

We have had a good July thus far in the stock market. Be careful not to get to comfortable again with risk. Remember that markets don’t decline in a straight line. The talking heads at CNBC and other media outlets are as bullish as ever on the stock market. Of course, they were that way through most of the bear market between 2007 and 2009 as well.

Here is a look at the stats: