Shocking Chart Suggests Investors Could Be In For A Rude Awakening…

I saw an amazing chart this week.

It shows just how big the disconnect is between expectations and reality for the average investor. And it could have damaging consequences for those who aren’t aware of it.

You see, investors around the world are expecting extraordinary returns from the stock market.


Source: Natixis

In the long run, investors around the world are expecting average annual returns of 14.5% after inflation. In the United States, expectations are even higher at 17.5%.

In Stocks for the Long Run, Dr. Jeremy Siegel found that stocks have returned an average of about 7% a year after inflation over the past 200 years. Gains more than twice that level would be unusual if the economy is growing slowly.

Another researcher of stocks in the long run found that strong gains occur after valuation levels are low. Dr. Robert Shiller created the cyclically adjusted price-to-earnings (P/E) ratio, or CAPE, to define valuation over a business cycle.

Over the past 150 years, CAPE averaged 16.8. Its recent reading of more than 38 is more than two times higher than average.


Source: Multpl.com

What This Means For Us

Based on where we are now, it’s possible returns will be disappointing in the long run. Crestmont Research recently published an analysis showing that stocks could provide negative returns for decades. The table below shows the expected returns of the P/E ratio falls to an undervalued level, an average level, or to a mildly overvalued level.


Source: Crestmont Research

This all tells me that many investors are likely to be disappointed over the next 10 years. The most important conclusion I reached from all this data is that buy-and-hold strategies are unlikely to help investors meet their financial goals over the next 10 years, or more. Active trading strategies are needed, and I believe diversified trading strategies are needed to weather the upcoming market volatility.

But that is in the long run. In the short run, we do have trading opportunities that will be driven by the indicators.

My Income Trader Volatility (ITV) indicator remains bullish, and the SPDR S&P 500 ETF (NYSE: SPY) continues moving toward my price target of $440. (The target is shown in the chart below at $441.48, but round numbers tend to be important at all-time highs.) The $440 level could prove to be significant resistance.

ITV is similar to VIX in that it rises as prices fall. Its current position, with the indicator (red line) just below the moving average (blue line), points to potential strength in stocks.

Our last chart this week shows my Profit Amplifier Momentum (PAM) is bearish, consistent with the volatility we saw last week. PAM reacts quickly to large moves, and last week’s one-day selloff had a large impact on the indicator.

PAM is designed as a short-term indicator. Its bearish crossover is a potential indicator of weakness but because that crossover is the result of one large down day, we need to wait until later in the week to better gauge the status of the indicator.

Action To Take

As it’s been for the past few weeks, my outlook is unchanged. I continue to expect a sharp rally followed by a bear market.

But as I’ve said, that doesn’t mean we won’t have opportunities to make money. It just means that we’ll need to be flexible in the trading strategies we use, responding to what the market gives us, and then using those strategies to profit.

That’s where the strategy I use over at Maximum Income comes in.

It works a lot like an “insurance policy” — generating “premiums” that give us immediate income, which helps to lower our risk in this environment. But we still have the chance to profit from bullish moves…

This is about as close as it gets to the best of both worlds when it comes to investing. And I think every traditional investor would be well served to at least know how it works, so they can decide if it makes sense for them right now.

And I’m willing to bet most of them will agree with me on this.

That’s why I created a special briefing, which explains how this “market insurance” works. Go here to check it out now.