Friday, 16 June 2017 00:00

Why a Bear Market is Coming

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(New York)

The market has done well this year, and while many are worried about rising valuations, investors keep piling into the stock market. However, that may be exactly the reason that stocks could be poised to fall. The indicator to watch is the ratio of average allocation to equities. Interestingly, when this number is high, stocks tend to perform very poorly in subsequent years, while when it is low, they do well. Right now the average US allocation to stocks is 39.2% of financial assets, a level which was hit only one other time since 1950 (in the late 1990s). The other times it has hit high levels, bear markets or bad returns have followed. The catch of the figure is that it does not mean any drop is imminent, it is better used for long-term forecasting.


FINSUM: This is a classic contrarian indicator, and definitely something to pay attention to.

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