The stock market is broken and in a bear market. I say this not simply because it is down, but because what preceded the move down last year, which was a classic stage three top in which most stocks fell into a bear market way ahead of the market averages. I think the best way to understand what is happening is that we are going through a financial mish-mash of the 1970’s and the summer of 2000 top. It’s like the 1970’s because we got inflation and money flowing into gold, silver, and commodities. That is where the money is made now, but it’s like the summer of 2000, because so many fad stocks plays are falling and falling and the masses are trying to catch them like falling knives.
You can see this for example in the chart of Facebook.
There is no reason to think Facebook has bottomed. It crashed 20% in January and is dropping and dropping, much like Lucent and Compaq did when they blew up in the Spring of 2000. It also no longer has revenue growth so is no longer an earnings growth stock.
NFLX crashed 20% too and is dumping. Of course the ARKK ETF is sinking daily now taking on more and more sellers.
Inflation is real and there is more to it than just Ukraine, but there is no doubt that the war there is causing spikes in wheat and oil.
People are going through a sticker shock at the gas pump and grocery store just like they did in 1973.
The stock market is in a bear market now trading well below its 200-day moving averages.
That said, bear markets don’t go straight down and we could get a bounce here, much like we did at the end of January if more panic comes into the market soon.
Take a look at the S&P 500.
Panic tends to come into the market when the VIX gets close to 40. It closed yesterday at 36.45, so we could see a bounce begin soon if there is more selling today or at some point this week.
The problem, though, is that the market really isn’t oversold. The RSI isn’t below 30 nor are the daily stochastics for the S&P 500 even below 20.
So if it does start to bounce here, it’d probably just be a weak one.
But any bounce now for people is better than none!
That’s what bear markets are like.
The solution is to use rallies and up days to get out of lagging stocks and into the few sectors that are breaking away from the market and continuing to go up in bull markets of their own. I talk about those in a video I put up yesterday. Here it is in case you missed it.
-Mike
