NEW YORK (TheStreet) -- One question on investors' minds in 2015 is, will the stock market go through a correction, and how painful will it be?
Over the last 15 years, investors have been through a lot in terms of market volatility. From the 2000 tech bubble bust and the 2008 financial crisis bear market, investors are far from having their investment psyche scars healed -- and for good reason. Some sustained heavy losses in their portfolios more than once and are not willing to do it for a third time.
The stock market has a tendency to move in six-to-eight year cycles. The current bull market is now at seven years and there are several indicators signaling weakness. A bear market could be about to emerge. Beyond market cycles and technical indicators, rising interest rates can cause weakness in the equities market.
If you know what to look for and time it right, you can escape the next bear market and profit from falling prices.
The Near-Impossible Trick to Beating Bear Markets
Question: if you could put your money in a guaranteed investment not to lose any principle and receive a 1% per annum return; or, potentially receive 7% per year but with no guarantee on your principle, which would you choose?
Most people would choose the 7% return option because they understand financial rewards almost always require some risk. Over the last 90 years, the stock market has on average returned 7% annualized gains.
Obviously not all years will have a positive gain, but when averaged over many years, it is reasonable to expect an annual return of 7% from the stock market.
What if I told you there is a way to improve on this? For example, if you simply moved your equity investments to a large cash position at the start of each bear market?
The chart below shows the gain you would have from 1995 to 2015 if you sold your stock holdings when the U.S. stock market topped, avoiding the last two bear markets.
Having a 100% cash position during bear markets would have generated 635% return on investment, which is a 31% average annual return. The numbers are staggering to say the least.
Obviously you cannot pick the exact top and bottom, but even if your timing was way off and you only pocketed half of those gains you would still be way ahead of game.
The trick is timing it right. If you knew how to do that, you'd be the world's greatest investor.
That said, even timing it partially right can reap great rewards.
Take a look at the charts below. The first one shows the 10-year treasury price which, has broken its short term resistance levels and is rocketing higher. We have seen this happen six-to-12 months before the last two bear markets started.
Now let's take a look at the Fed rates.
Not every rate rise turned into a recession, but nearly every one has. Rising rates often leads to a market downturn.
Could the next bear market or recession occur when rates start to climb? It could be only a few months to a bear market from when the initial rate hike is announced.
That combination of technical indicators with what will almost certainly be a Federal Reserve rate hike has created the perfect storm for a bear market to emerge, which you can expect to last one-to-two years.
Bottom line, we are still in a bull market but only months away from a bear market. Do not ignore these warning signals.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.