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3 Steps and a Stumble” Rule and Why Investors Should be Cautious

Famed market guru the late Martin Zweig noticed the market usually under performed dramatically over the years when the Federal Reserve raised interest rates three times during a given cycle.

Why?

  • Higher rates increase corporate financing costs, weakening earnings.
  • Rate hikes also increase investor margin expenses, which is particularly dangerous now when there has been a record amount of stock bought on margin.
  • The Fed raised rates in March and June this year following three rate hikes last year.

    The Fed says it will raise rates two more times in 2018.

    The chart from NDR shows when the 3 steps and stumble rule was followed by declines in the Dow Jones Industrial Average going all the way back to 1915.

    What does this all mean?

    The stock market could be overdue for a major downturn.


Brad Lamensdorf

Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.

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