I really respect the work of Mark Cook, an extraordinary investor featured in Jack Schwager’s best-selling book, “Stock Market Wizards,”
Mark Cook uses a proprietary measure he created in 1986 called the “Cook Cumulative Tick” to determine if the market is overbought or oversold. The indicator combines the NYSE with stock prices for its ratings.
Mark predicts that within the next 12 months there will be a stock market correction of 20% or greater. Here’s what Mark had to say recently about his CCT.
“There have been only two instances when the NYSE Tick and stock prices diverged radically, and that was in the first quarter of 2000 and the third quarter of 2007. The third time was April of 2014,” Mark Cook says.
“The probability of us going up 5% from here is possible, but there’s a higher probability of us going down 20%.”
“Think of a dam that has small cracks that are imperceptible to the eye,” he says. “Finally, the dam gives way. Eventually, prices will go south, and the Tick numbers will be horrific.”
“It’s like being in the Twilight Zone, he says. “Imagine going outside when it’s raining and getting sunburned. That’s the environment we’re in right now.”
Cook doesn’t know when the correction will take place or what event(s) will trigger the correction.
There’s also the risk of keeping interest rates ultra-low for too long which leads to greater and greater risk taking by investors. Martin Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan had the following comments on the subject. “Artificially low interest rates are dangerously luring investors into taking risks they wouldn’t otherwise take.” “Very low interest rates are driving lenders into taking risks, low-quality loans [and] investors into buying junk bonds with low spreads,”
The last time that happened it led us to an economic crisis. What makes anyone think it will be different this time?
I’ll go back to Mark Cook one more time for his answer. “Some people might say it’s ‘different this time,’ but it’s never is. Could the market go higher? Yes, it could, but the extension of time will create an even greater divergence that has to be snapped back together.”
We are still in one of the greatest economic experiments of all time. While Yellen will get a great deal of the criticism or acclaim depending on what happens, this is still Bernanke’s experiment.
With all that being said, the U.S. Markets are still the safest in the world at this time which is luring more investors. The U.S. economy has improved with 10 % year over year growth, employment up and inflation still at a low 2%. Predictions going forward are for 8-10% year over year earnings growth and 2-4% GDP going forward. Those are strong numbers which are already priced into the market.