Last month we saw the stock market take a dive. It peaked out after the Federal Reserve meeting held in the first few days of the month, but few noticed the slow drip drop until the day after Thanksgiving in which the DOW had a big dump and news of the new virus variant, first discovered in South Africa, hit the television programs.
Over that weekend, I penned an article saying that I thought on a short-term basis the stock market was likely to rally, as the VIX fear index had surged, but that what we were seeing in the market had all the signs of being a stage three topping phase.
The market has rallied, but despite the wonder day DOW Monday move yesterday, the rally has been very weak. The Nasdaq and Russell 2000 has barely bounced at all, and the Cathie Wood ARKK remains stuck in the mud. It IS NOT the ARK of the Bible and it was an act of blasphemy for her to link herself to it.
In the end, her ARKK will one day cease to exist!
I still think the market is likely to rally a little more, but I believe the odds of it completing a stage three top and falling into a bear market next year are high. A confirmed bear market would signal if the DOW, S&P 500, and Nasdaq all finish a week below their 200-day moving averages. The DOW briefly went through that key indicator last week, but is rallying off of it, while the other two indices went up so much this year that they are still elevated above it.
What is key, though, in what the market does, is figuring out why it fell last month in the first place.
The decline had nothing to do with the virus variant.
For one thing it started to dip before it became known.
Secondly, the stocks that went up to benefit from lockdowns and shutdowns didn’t go up after the new variant news.
Take a look at Zoom for instance, as it was the wonder stock of 2020.
Despite the scare of the variant, it failed to rally.
And finally, this variant, so far, isn’t as scary as it first sounded when the TV talking heads played loud music and talked real fast about it to present it is a scary “breaking news.” Yes, it seems to spread fast, but the reports now indicate that it is not as dangerous as it first seemed as the symptoms people are reporting so far are more mild. As Statnews.com wrote, “The South African Medical Research Council posted a report Saturday of the early experiences at several hospitals in Gauteng Province, where Omicron was first spotted in the country. Strikingly, most hospitalized patients who tested positive for Covid did not need supplemental oxygen. Few developed Covid pneumonia, few required high-level care, and fewer still were admitted to intensive care.”
Even if that information turns out to be too good to be true, there is no reason to think this new variant is some huge game changer to the negative for the state of things nows.
If it was then stocks like ZM would be going up instead of going down.
And that actually tips us off to what is going on.
There is simply a continued decline going on in the internals of the markets. Most stocks are ALREADY in bear markets even if the major market averages are not – at least not yet.
Take a look at the internals of the market. This is the percentage of stocks on the NYSE below their 200-day moving averages.
This indicator went below 50.
Typically when stocks falls this bad and this indicator goes to 50 one of two things happen.
The first is what usually happens and that is you get a major market bottom or at the least the start of a huge rally.
For that to happen this current rally that started on Monday needs to accelerate fast. It needs to spread to the wonder stocks typified by Cathie Wood holdings, of which ZM is one of.
The second is that you simply see most stocks work of oversold conditions by just sitting there and going sideways to set themselves up for another stair step decline.
That actually is what this indicator did when the last true bear market started in the Fall of 2007.
In 2007, the internals of the stock market collapsed in August of that year. It happened after the first big hedge fund failed holding subprime securities and it was that decline that led to Jim Cramer yelling on CNBC for Fed action to help banker friends of his. The market rallied into October and peaked and fell into a bear market that led to the crash of 2008.
But after that October peak you can see how the internals went into an extended decline.
Really the huge decline in the internals that August was a warning that everything was changed that became confirmed by the end of the year. All the signs were there and pros saw it and adjusted while the masses sat there ignorant of what was going on and got wiped out a year later.
The market feels now very similar to the way it was acting in.
It also has similarities to the summer of 2000 with wild valuations and bubble stocks inside the market blowing up.
Back then you had the Janus Fund and now you have Cathie Wood’s ARKK.
We also have a Fed that is slowing down its QE operations and in a position where it is going to have to raise interest rates due to inflation. A secular top in bond yields is going to be toxic for stocks.
All the ingredients are there for a bear market in 2022.
To stop that from happening the bulls must take charge in this market and not just drive a big up day in the DOW, but bring buying throughout the market and bring life back into the internal indicators and the bubble stocks inside the ARKK throughout this week and really into the end of the year.
Indicators like this, which is the accumulative volume a/d line for the S&P 500, cannot break down before the end of the year.
It’s going to take another week or two for all of this to play out, but I believe that the prudent thing to do is to GET OFF margin and reduce risk as too many people are taking a lot of both.
In fact, people actually drove margin debt to record levels going into last month!
What happens in the second half of this month will be key for next year.
-Mike
