Investment strategist and newsletter publisher Michael Belkin, whose proprietary model correctly forecast market peaks in 2000 and 2007, says it's time to move into defensive investments, according to Barron's. In particular, Belkin worries that the markets are "in a crazy bubble based on central banks' quantitative easing," as quoted by Barron's. (For more, see also: Stocks Face "Nasty Shock" From Fed-Created Bubble.)
For his Apocalypse Portfolio, Belkin recommends stocks such as oil exploration, refining and marketing giant Chevron Corp. (CVX), gold and copper producer Newmont Mining Corp. (NEM), silver miner Pan American Silver Corp. (PAAS), and telecom services provider Verizon Communications Inc. (VZ). He also advises short sales of semiconductor manufacturer Nvidia Corp. (NVDA), Google parent Alphabet Inc. (GOOG), and discount broker Charles Schwab Corp. (SCHW), among others.
As a general trend, Belkin expects investors to rotate out of richly valued technology shares into more defensive energy and utility stocks that offer attractive dividend yields. Indeed, he finds energy shares that were hurt by the drop in crude oil prices to be particularly attractive right now. U.S. Treasury Bonds are another alternative for safety-oriented investors, he adds.
Belkin recommends Chevron as a cheap defensive stock with a dividend yield of more than 4%. With Newmont Mining, gold typically shows a negative correlation with the S&P, and is in a bullish trend right now. Regarding Pan American Silver, he expects silver prices to climb faster than gold, and he notes that there is a smaller universe of silver mining stocks than gold issues. He sees Verizon as inexpensive and less risky than technology shares, and it offers a 4.8% dividend yield.
Additionally, Belkin suggests several exchange-traded funds (ETF) and notes (ETN), including the CSOP SZSE ChiNext ETF (3147.HK) as a play on $1 trillion of infrastructure spending in China. He also recommends the iPath S&P 500 VIX ST Futures ETN (VXX), a heavily shorted ETN linked to the CBOE Volatility Index (VIX) that he says could jump in price if market volatility finally picks up.
What to Short
Belkin says that it's time to short some tech favorites and financial stocks whose prices have dropped under their 200-month moving averages, a signal to him that they could be headed even lower. Nvidia and Schwab are among the vulnerable stocks that he finds in these sectors. Google parent Alphabet Inc. is among his shorts on the basis that it is over-owned, and thus vulnerable to heavy selling in a market downturn.
His analysis of market moving averages, meanwhile, suggests that the tech-heavy Nasdaq Composite Index (IXIC) may be significantly overpriced, foreshadowing a drop of 50% or more. Using the same methodology, his model turned bearish in 2000, Barron's says. From its dotcom bubble peak in March 2000 to its low in October 2002, the Nasdaq Composite fell 78%.
The current U.S. economic upturn is now 99 months old, the third-longest since 1902, Belkin notes. Moreover, he is among many observers who warn that it has been artificially sustained by the Federal Reserve. He sees a recession on the horizon, key indicators being that growth in automotive sales and retail sales peaked in December and January, respectively. With corporate earnings eventually declining in a recessionary environment, stock prices will follow, he indicates. (For more, see also: Bear Market Ahead: What 5 Big Investors Forecast.)
Bear Market Precedents
The last bear market in U.S. stocks ran from October 9, 2007 through March 9, 2009, for a duration of 17 months. During this time period, the S&P 500 Index (SPX) lost 57%, the Dow Jones Industrial Average (DJIA) Index fell 54%, and the Nasdaq Composite Index dropped 55%. How far can the markets drop today? For example, the S&P 500 closed last Friday 61% above its October 9, 2007 close, per Yahoo Finance, a much higher perch from which to tumble.
The experience of 2007 to 2009, however, was rather modest compared to the brutal 34-month bear market of 1929 to 1932. In speaking of the stock market crash of 1929, most people just refer to the Dow's 23% cumulative drop during two consecutive days, "Black Monday" October 28 and "Black Tuesday" October 29, 1929. However, that bear market ran all the way from September 3, 1929 through July 7, 1932, during which time the Dow plummeted 89%, per MacroTrends LLC, and the S&P shed 86%, per NBC News.