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Posted on 15 April 2012 | 3,189 views

The Coming 32% Stock Market Crash of 2012

Last week, the benchmark S&P 500 Index fell just shy of 5 per cent in five days and now investors are wondering — does the liquidity-fueled rally in the US Stock Market resume?

From October 2011 through to the end of March 2012, the S&P 500 gained 33 per cent. These types of gains have happened before — such as in 2003 and 2009 — but have been on the back of major Bear Markets when valuations were at multi-year lows.

History tells us the US market should be nearing the end of its current surge. If this, as most market watchers believe, is the third secular bear market in the last 80 years, the pain is not over. A secular bear market is an extended period of negative returns for investors. It must be distinguished from a cyclical bear market that is measured by a straightforward 20 per cent fall. A cyclical bear market can be over in weeks, while a secular bear market lasts for many years and can contain many rallies and many declines.

In the horror period following the 1929 Stock Market Crash the Dow Jones Industrial Index fell, once inflation is taken into account, by 67 per cent over 19 years. During this period the US economy experienced four official recessions.

From 1966 the US stock market fell an inflation-adjusted 62 per cent over 16 years. Again, the economy had to endure four recessions in this period. This horror stretch for equities was also characterized by historically low stock valuations and monster rallies that all petered out. The market attempted to break out of its downward trend five times in a period of 16 years, coming up short each time.

In comparison, the current secular bear market in the US has been mild. The official starting point was in March 2000 when the Dow Jones Industrial Index and the broader S&P 500 Index peaked following a technology turbo-charged 18-year rampaging bull market. We have just celebrated the 12th birthday of this secular bear market.

So far the market has fallen, inflation adjusted, by 30 percent and the economy has encountered just two recessions — history tells us that more time and unfortunately, more financial pain must take place for this secular bear market to replicate the past.

Some stocks which may correct further then the broad market are MAKO Surgical Corp. (Stock Symbol: MAKO), Baidu, Inc. (Stock Symbol: BIDU) and Priceline, Inc. (Stock Symbol: PCLN).

If history is an accurate guide, the US stock market will again experience a summer of 2012 pain — a retracement of 20 percent is a distinct possibility. This would in turn set up a fabulous buying opportunity that many would ignore because of the treachery of the past 12 or so years.

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