Ramsey Sees Bear Call Affirmed With S&P Selling Halfway Done

  • Leuthold CIO correctly predicted the August 2015 stock selloff
  • The S&P 500 is down 8% in 2016, the most ever to start a year

Doug Ramsey picked the top for stocks in 2015 and now he says the Standard & Poor’s 500 Index has another 10 percent to drop before the selloff that has been rattling investors since New Year’s is over.

Pessimism is proving prescient for the chief investment officer at Leuthold Weeden Capital Management LLC, who stuck by bearish predictions in October even as U.S. equities had the steepest monthly gain since 2011. That’s a memory now. More than $2 trillion has been erased in the worst start to a year on record and Ramsey says it’s likely to get worse, if history is any guide.

Doug Ramsey

Source: Leuthold Weeden Capital Management LLC

Ramsey, who mixes technical and sentiment analysis with fundamental research, asserted in early August that the “next big move in stocks should be down,” citing weakening breadth among rising stocks. Today, his most conservative forecast calls for the S&P 500 to fall to its median historical valuation since 1957, a reversion that would push it down 9 percent from its level on Friday to around 1,700. The index rose less than 0.1 percent to 1,881.33 at 4 p.m. in New York.

“There’s more downside ahead in what’s held on the best, like the Dow and S&P,” he said in a telephone interview. “Those are generally the last to fall.”

Capitulation in the biggest companies will spell the end of a bull market that started in 2009 and at its highest point in May had seen share prices triple, Ramsey said. While three weeks of losses have created the potential for a “violent bounce,” selloffs such as Friday’s, when the Dow Jones Industrial Average was down more than 500 points at midday, have also been the precursors of even bigger meltdowns over the last 100 years.

“That’s a worry,” Ramsey said. “There’s a slim probability of a crash in this type of an environment.’

As in August, Ramsey’s bear case is based on weakness below the surface of the biggest and best-known indexes -- even though both the Dow average and the S&P 500 have now fallen more than 10 percent from their records. The Russell 2000 Index of small-cap stocks is down 22 percent since June, and losses look worse when market-value biases are stripped out of the capitalization-weighted indexes.

Taking a historical view of charts suggests the selling isn’t over to Ramsey, who throughout 2012 and 2013 was bullish on U.S. stocks. For instance, a 50 percent reversal of the S&P 500’s rally from October 2011 to May 2015 would push the index to 1,615, down 14 percent from its current level of 1,880.33.

Mimicking the average bear-market slide of 27.5 percent since World War II lands it near 1,550, a 17 percent drop. “There are a number of things that point to the 1,500 and 1,600 zone,” he said.

Bulls have been lulled asleep because the biggest averages have been propped up by a handful of companies whose stock market success doesn’t reflect the economy, he said. If the companies in the S&P 500 were weighted equally, the index would be down an additional 0.9 percentage point this year.

“The high-quality mega-cap stocks with relatively defensive business models are where people gravitate during bear markets, and it’s creating an extreme bifurcation,” said Ramsey. “When those finally crack, that could be the end of it in terms of the S&P 500.”

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