Last week a friend of mine gave me a gift of Italian sweets that were cookies filled with chocolate crème – delicious! Last week was also filled with interesting articles on the coming stock market meltdown – which I tweeted about @MoneyWeatherMan. Those tweets are what I am going to talk about in this week’s blog.
In my first tweet I referenced an article on MarketWatch by Shawn Langlois that showed a graphic of the Dow with a projection of a 1929 style crash. The reason for this projection, is the current level of the CAPE (Cyclically Adjusted Price-to-Earnings) ratio. This ration is currently above 30, which has only occurred twice before in the 100+ year history of the Dow – 1929 and 2000. I personally don’t expect a 90% drop in the value of the Dow, which is what a 1929 equivalent crash would mean; however, I do expect challenges to the stock market, due to influences from the business cycle.
In my second tweet, I referenced an article from thestreet.com which contained an interview of the famous investor Jim Rogers by Daniela Cambone for Kitco News. In this interview, Rogers states that for the whole history of our republic we have had financial issues every four to eight years (the business cycle). He also said that it has been over eight years since the last on, so we are due (or overdue). Rogers said that he is long on dollars, because he expects when the crisis occurs people will want the safety of the US$. Then when the dollar goes up, gold will go down, so he will sell his dollars for gold.
In my third tweet, I referenced another article on MarketWatch, this one by Ryan Vlastelica, that discussed last week’s stock market selloff. The article has a funny picture from the movie The Money Pit with Tom Hanks, and the title of the article is “Bruising stock-market selloff may have cracked the rally’s foundation.” Basically, the article is saying that less than 50% of stocks are above their 200-day moving average, and this indicates potential resistance to further advances in prices in the market.
The best advice I can give is to repeat what Jim Rogers said in his interview: “be careful.”