US Government Prepares More Wealth Destruction, Bear Market Looms

US Government Prepares More Wealth Destruction, Bear Market Looms

$DIA, $SPY, $QQQ

Reality Shares’ new Guardian Gauge predicts the S&P 500 will see more declines

The new indicator for the S&P 500 Index of the largest US stocks shows the likelihood of a broad, long-term decline ahead.

The benchmark has fallen 6.8% this year, pushed down by an 11% correction from 17 thru 25 August. Earlier, in May the S&P 500 marked new all time highs.

Savvy participants are braced for more declines as there are lots of indications of trouble ahead, as the S&P 500 trades for 16X aggregate consensus for Y 2015 earnings estimates, which are near a 10-year highs.

Another headwind is the uncertainty coming from the Fed, as Chairwoman Janet Yellen said last week that she anticipated an increase of short-term rates “later this year, followed by a gradual pace of tightening thereafter.” That is jawboning the markets, as the Fed knows there can be no rate hike based on the weak economic data and missed 2.0% inflation target.

The federal funds rate has been locked in a range of Zero+ since Y 2008. That with the massive expansion of the central bank’s balance sheet, made stocks attractive to particpants who might otherwise have been invested in savings or other asset classes.

Reality Shares, a San Diego-based firm founded in Y 2012, has a new market-health indicator called the Guardian Gauge, which uses volatility and price-momentum data to give a long-term outlook for the S&P 500.

Reality Shares The Guardian Gauge is suggesting a Bear Market for stocks looms large in here.

For the past 15 days, the Guardian Gauge has been in the Red.

Reality Shares CEO Eric Ervin, in an interview last week said, “Guardian looks at the 10 sectors of the S&P 500. If three of the sectors go negative, it signals a very high probability of going into a bear market. Over the past 15 years, it would have predicted the tech wreck and the financial crisis.”

Reality Shares says that, from the end of Y 1956 through the end of Y 2014, a market timing strategy based on the Guardian would have produced an average annual return of 8.92%, Vs an average return of 7.62% for the S&P 500.

There’s also no guarantee that the market will follow familiar patterns, even those based on 58 years of data. But the better result for the Guardian strategy is impressive. Those differences add up in the long term.

Mr. Ervin said that for a 3-day period during the tech bust 15 years ago, the Guardian would have turned positive because the IT sector had been “pulling down a few others with it … so it would have only taken one strong sector to move the Guardian above the line.”

What Mr. Ervin sees now is a much broader-based decline. He expects the healthcare sector to be in the Red soon, which will push the Guardian score lower. “We’re seeing a broad destruction of wealth,” he said.

Have a terrific week.

HeffX-LTN

Paul Ebeling

The post US Government Prepares More Wealth Destruction, Bear Market Looms appeared first on Live Trading News.