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How to prepare for the next major selloff in stocks: trader

By Yves Lamoureux, president and chief behavioral strategist of macroeconomic research firm Lamoureux & Co.

The “wisdom of the crowds” oftentimes leads investors astray, but a skilled contrarian can gauge herd mentality to find long-term trends before they are evident to most. Just such a contrarian opportunity is presenting itself in US stocks, as calls for “Dow 20,000” are about to fall by the wayside.

Most astute investors recognize that it’s difficult to consistently improve results with present trading and investment tools. We have been coaching institutions for more than three years, and in these coming articles, we will show you how to increase your skill set.

They will give you the ability to get in on the ground floor of large non-consensus trades. A recent example was our Japan call on Yahoo Finance back on September 1, 2016 to be long Japanese stocks. Our target of between 19,000 and 20,000 was reached on the Nikkei 225 index. We closed the trade with a tweet on January 4, 2017.

Source: Twitter
Source: Twitter

The results smoked US stocks and is one of the better alpha generation moves of the second half of 2016. See the performance of the S&P 500 index ETF (SPY) versus the WisdomTree Japan Hedged Equity ETF (DXJ) over this period.

Japan Hedged Equity (DXJ) versus S&P 500 (SPY) — 9/1/2016 to 1/4/2017

Source: Yahoo Finance
Source: Yahoo Finance

The coming correction in US equities before an explosion higher

The adept investor must have a flexible opinion on the market that fits the data.Count us bulls when we need to be and bears when the time is right. Based on our model of price multiple expansion, we were able to make a very profitable bullish call on equities at the interim low of January 18, 2013, in the same fashion as the bottom in late 2008.

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Since then, every pullback in stocks has brought forward calls from us to buy the dip, and we’ve been bullish on the so-called Trump Trade thus far. Until now …

Statistically, over the last 200+ years, the year ending in 7 has been difficult for stocks. A few examples demonstrate this seasonality:

  • the crash of 1797

  • the embargo act of 1807

  • the bank war leading to the drop of 1837

  • the crash of 1857 following the civil war

  • the crash of 1877

  • the crash of 1907

  • the mini-crash of 1997 caused by the Asian crisis

  • and, more recently, who could forget the crash of 1987 and the 2007-2008 financial crisis?

We believe a larger cycle pullback is now a necessity before the bull market can continue to materially higher highs. In other words, a correction would be healthy if the Dow (^DJI) is set to reach levels of 35,000 to 50,000.

Our next article will show you how to prepare for and quantify the next pullback in equities.

By Yves Lamoureux, January 16, 2017 ©Copyright, Lamoureux & Co.

This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product or service.This publication is proprietary and is intended for the use of the subscriber only. All information provided is impersonal and not tailored to the needs of any person, entity or group or persons. Lamoureux & Co. shall not be liable for any claims.