Being Right or Making Money, 3rd Edition

CHAPTER 5 Potential Bear Market in 2014; Bearish Secular Residue and Then Buying Opportunity

NED DAVIS

Preparing for a (Say, 20 Percent) Bear Market

The case for a bear market in 2014 largely comes from the overbought, overvalued, and overbelieved sentiment we saw at the end of 2013, but there are also some cyclical, demographic, and residual debt-bubble concerns that are worrisome. In this chapter I want to go through sentiment/valuation indicators, along with the tape and macro factors I use to manage risks in the stock market. I will also include some charts that I'll be watching to see where I could be wrong.

Let's start with the sentiment/valuation indicators that particularly bother me.

Sentiment and Valuation Indicators, If One Wanted to Be Bearish

The weight of the indicator evidence currently leans bullish. There are always indicators that disagree with the weight of the evidence, so it is important that we have an objective model (like the Fab Five, which was explained in Chapter 3) to help keep us in line with basic conditions, such as a bullish tape and a friendly Fed.

Yet one never knows for certain in this business, and it may be helpful, for flexibility and an open mind, to know the other side of the debate, should trends change. So now let's look at some worrisome sentiment indicators that tell me we are in the later phase of the cyclical bull market, meaning the evidence now is just mildly, not wildly, bullish.

Among the evidence that bothers me is shown ...