MARKET WATCH

July 29, 2014, 7:59 a.m. EDT
Stock trader who called three crashes sees
20% collapse
Insight: Veteran investor expects bear market within 12 months

By Michael Sincere


MIAMI (MarketWatch) — Mark Cook, a veteran investor included in Jack Schwager’s
best-selling book, “Stock Market Wizards,” and the winner of the 1992 U.S. Investing
Championship with a 563% return, believes the U.S. market is in trouble.


The primary indicator that Cook uses is the “Cook Cumulative Tick,” a proprietary measure he
created in 1986 that uses the NYSE Tick in conjunction with stock prices. His indicator alerted
him to the 1987, 2000, and 2007 crashes. The indicator also helped to identify the beginning of a
bull market in the first quarter of April 2009, when the CCT unexpectedly went up, turning Cook
into a bull.


What does Cook see now?


“There have been only two instances when the NYSE Tick and stock prices diverged radically,
and that was in the first quarter of 2000 and the third quarter of 2007. The third time was April of
2014,” Cook says.


In simple terms, as stock prices have gone higher, the NYSE Tick has moved lower. This
divergence is an extremely negative signal, which is why Cook believes the market is losing
energy.


In fact, the Tick is showing a bear market, which seems impossible considering how high the
market is rising.


“The Tick readings I am seeing (-1100 and -1200) is like an accelerator on the floor that is
pressed for an indefinite amount of time,” Cook says. “Eventually the motor will run out of gas.


Now, anything that comes out of left field will create a strain on the market.” Since the CCT is a
leading indicator, prices have to catch up with the negative Tick readings.


“Think of a dam that has small cracks that are imperceptible to the eye,” he says. “Finally, the
dam gives way. Eventually, prices will go south, and the Tick numbers will be horrific.”


Cook is also concerned that the market is acting abnormally. “It’s like being in the Twilight
Zone, he says. “Imagine going outside when it’s raining and getting sunburned. That’s the
environment we’re in right now.”


Unfortunately, Cook can’t say when this vulnerable market will crack. “The CCT is similar to
the new-high, new-low indicator,” he explains. “As the market goes higher, fewer stocks make
new highs. Some people might say it’s ‘different this time,’ but it’s never is. Could the market go
higher? Yes, it could, but the extension of time will create an even greater divergence that has to
be snapped back together.”


Cook predicts that within 12 months, the market will suffer a 20% or greater pullback. Says
Cook: “It may take months and months for the correction to develop. I don’t look at how low the
market drops, but how it rallies. I will look for lower highs and lower lows. Every rally aborts
before the previous high, and every decline penetrates and accelerates below the previous low.”


One of the reasons that Cook has survived as a trader for so long is his credo: “There is always a
way to make money.”


For Cook, that means being flexible enough to change strategies and take a 180-degree turn.
“The scenarios we will see in the future will be totally different than what is now,” he says. “You
will have to navigate differently. It’s like going through a jungle that ends and becomes a desert.
There is only one constant, and that is change.”


In fact, Cook excels in volatile markets. “I’m amazed that we have gone over two years without
a double-digit correction,” he says. “Without volatility, you get a complacent environment like
we have now, which can lead to devastation. You can’t stay at these complacent levels forever.
When there is a correction, it will be very severe.”


Cook says that when volatility gets light (like it is now), traders and investors give up. “A lack of
volatility is not good for the market,” he says. “Low volatility begets thinness, and that begets
low volume, which equals greater risk.” One day, he adds, volatility will return, and so will the
traders.


Another key to Cook’s success is his ability to correctly assess probabilities. Right now, he sees
a greater than 75% probability of a major correction, but this could unfold over a long period.
Says Cook: “The probability of us going up 5% from here is possible, but there’s a higher
probability of us going down 20%.”


Cook also is not a big fan of the Fed’s policies. “The Fed is creating abnormalities which creates
stress on the markets, similar to a pendulum swinging. I believe the honeymoon is over for
Yellen from this point forward. The magnifying glass will be on her. Typically, within 12
months of a new Fed chairperson, the market gets more volatile.”


Cook knows there will be a catalyst that will “burst a hole in the ship, which is already taking on
water, even though stock prices haven’t reflected that. The cannonball that will finally sink it
will come from a source that we can’t see. But when the cannonball hits a ship that is already
partially flooded, it will sink a lot quicker. I’m not sure the Fed is quick enough or flexible
enough to head off a disaster.”


Looking forward, Cook says he wants to see if the S&P 500 is (SNC:SPX) lower in July after
the backdrop of a better economy, low interest rates, positive earnings, and a lower
unemployment rate. If July is down, that would confirm the significant divergence.


“The tape looks exceptionally tired and heavy,” Cook says. “I see a huge divergence between the
weak internals of the Tick and the rising stock prices. The divergence is as wide as the Grand
Canyon. It’s incredible.”


Michael Sincere (www.michaelsincere.com) is the author of “Understanding Options,” “Understanding Stocks,”
and “Predict the Next Bull and Bear Market and Win.”


FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND
MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES
MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY RESPOND
IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT IN THE CASH
MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED
FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL DEMAND AND
CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED IN THE PRICE OF
THE UNDERLYING FUTURES.