Home Stock Market Commentary The Stock Market Decline Is Turning Into A Generalized Sell-Off – Mike...

The Stock Market Decline Is Turning Into A Generalized Sell-Off – Mike Swanson

The stock market futures are up before the open after what was a brutal Monday in the markets, but the S&P 500 has been falling since New Years, even though people like Cathie Wood, and people who mimic her, have claimed that inflation would go away so the stock market would go up.

It’s a bear market and we saw the classic warning signs last year when the stock market internals peaked out over twelve months ago. But now the market decline is turning into a generalized sell-off as just about everything got whacked yesterday.

The price of oil came off of its high and the price of gold fell 1.48%. The S&P 500 fell at twice that rate yesterday and the Nasdaq fell over 4% so gold is dipping less than the stock market is, but it is dipping with the markets now.

Gold and commodities still remain well above their 200-day moving averages, but the S&P 500 is now below it and those moving averages are now trending down to act as major resistance in a stage four cycle decline.

The action is starting to hurt people who got into trading after the March 2020 market meltdown via Robinhood and have no real idea what they are doing. They are now in their anxiety and anger part of the decline. A Robinhood trader went nuts in Oregon and got himself arrested after making threats to harm Robinhood employees and management. He obviously is incapable of taking responsibility for his own decisions and is lashing out in anger and belongs in a rubber room.

But he is an extreme example of what millions are now feeling. This anxiety and anger phase will eventually morph into a mass panic and despondency phase, which will bring panic selling in the markets from small traders and individual investors. We aren’t there yet as they keep trying to buy, but that’s where things are heading and sadly I wouldn’t be surprised if we hear about some Robinhood people actually hurting themselves. It happened with daytraders after the 2000 tech bubble top and in 2008 and will probably happen again.

The problem is there is no sign of a real bottom in the markets that we can point to.

Sure, it can rally a few days, and it had a big one day wonder rally last week, but we are now in a generalized sell-off.

Take a look at the chart of the S&P 500.

The S&P 500 is now trading below its 4100-4150 support level and its lower 200-day Bollinger band. It broke down yesterday like the Russell 2000 did in December.

The VIX only went up 11% yesterday.

On Fidelity people just piled in trying to buy more, with no signs of panic selling at all!

As you can see the only thing that got more sells than buys at the top of the Fidelity list was a 3X short ETF and people decided to try to pile into Gamestop with a 10-1 buy to sell order ratio!

They piled into RIVN by 3-1 even though the stock crashed by 20%!

This is not how bottoms are made.

We hope for a bottom soon, but action like this could go on for over a month.

I’ve been trading the markets almost 25 years now and the action in US stock market averages is similar to the way gold and mining stocks broke down in the Fall of 2012 after completing a stage three top. In fact, the averages are trading like the HUI would in a bear market.

The situation also reminds me of the generalized sell-off that started in September of 2000 and September of 2008 when the market broke down through its support lows of the year. During both of those declines gold fell with the market into the end of October and during both of those declines the corporate bond market fell, in fact it led the decline, just as it has led this one to the downside.

The corporate bond LQD ETF broke below major support and its lower 200-day Bollinger Band like the S&P 500 did way back in January.

Since the LQD broke down, it has been trading below its lower 200-day Bollinger Band, which has been acting as price resistance on it for what is now going on four months. This lower band has been acting as resistance for the ARKK ETF all year and now the Nasdaq is trading below it.

Staying cautious is the thing to do.

The only way you can buy after this ends is to have cash reserves that will enable you to do that.

It’s too early to be buying yet.

I had a trading service that I ran for twenty years and shut it down in 2020, because I feared this day would come.

If I still had the trading service and said wait and don’t buy now and talked like I have in the past six months I would have no subscribers left as people would have canceled in anger. I send my posts to some people I know personally that started trading in the past two years and they never reply and ignore them.

It’s not what people want to hear and we live in a time when people only want to hear what they want to hear and cannot take responsibility for their own actions and decisions. They fear making a decision and being wrong and rather just hold and lose money and then blame others or claim that the markets are manipulated against them. If they wanted to win they would go buy about a dozen classic trading books on the markets and traders and start to educate themselves on how things work. People too lazy to do that have no chance at winning at this.

They cannot tell themselves they might be positioned wrong for what is to come and they don’t want to do the work it takes to be a winner in the markets. Only 15% of people in the markets make big market beating returns and 50% lose money even in bull markets. They just throw their money at fads and end up holding the bag for the people running the stocks.

Hence you have the ‘Robinhood Oregon Robinhood trader who malfunctioned and the Fidelity traders just still buying the same old fad stocks that were hot fifteen months ago, unwilling to recognize that things are different now.

This is the moment where people new to the markets in the past two years are at a fork in the road. One one path they admit to themselves that they got over their head and recognize to themselves that they need to learn and do the work to win or they just keep doing what they are doing and wipe out and get taken out of the trading game. This is their decision moment that will determine which path they take now in the markets for the rest of their lives.

The whole trading world of selling services is going to wipe out with 90% of the businesses selling them and people selling them vanishing just like what happened after the 2000 tech bubble top as their subscribers cancel, seeing how useless the information is or wipe out themselves.

The S&P 500 could fall 20-30% from its highs before this over.

It’s down 16.65% year to date as of Monday’s close while the Nasdaq is down 26.02%.

Gold during that time is up 2.70%.

That’s not a massive gain for gold, but it’s a massive out performance relative to the S&P 500 that is only going to continue going forward.

No one can predict how much the stock market will decline here or when this drop will end, it could decline the way LQD has been doing for awhile, but look for gold to fall a fraction of a percent of what the S&P 500 does and then bottom ahead of the stock market and soar like crazy.

Be careful and keep your helmet on.

This is a tough time and a tough situation.

Bonds are in a bear market.

Inflation is real.

The stock market blew up into a bubble along with crypto, NFT’s, and even collectible cards and that bubble peaked out months ago.

That’s the macro driving this bear market.

It’s as simple as that.

What is happening is not that complicated, because it was inevitable.