As one trader I follow commented today, “the selling was just relentless, and there was no bid to the market.”
The fact of the matter is that we are likely in the beginning stages of a bear market.
At the very least, it will be extremely difficult for the market to make much headway in the face of a Federal Reserve that is set to begin a significant cycle of tightening.
With that said, the evidence is there that this is a bear market, and it should be treated as such until proven otherwise.
What is the evidence?
The Nasdaq Composite and Russell 2000 have been trading below their 200 day moving averages since early to mid January.
The Dow Industrials, S&P 500 and Dow Transports all closed below their 200 day moving averages again today after bouncing back above since the late January low.
The Dow Transports did not confirm the new high made in the Dow Industrials in early January. Therefore, Dow Theory is flashing a yellow signal that will turn red if either index closes below their January low closes.
Above are the daily charts for the Dow Industrials and Dow Transports. You can see that the high close in early January for the Industrials was not confirmed by a new high close in the Transports.
The Transports are just 1.2% above their late January low close, so the Dow Theory sell signal may be imminent.
I personally don’t see an imminent crash. This looks more like a slow and painful bear to me, reminiscent of 2000-2003.
Over a year ago, I was getting concerned with all the froth I was seeing in the market in names like Gamestop and AMC, along with the money flowing into Bitcoin.
Too many people were believing that making money in the market was easy, when it was clearly a liquidity driven event created by the Fed.
It is now time to pay the piper. The Federal Reserve is in a box, as it is way behind the inflation curve. The last time it went on a multiple rate hike binge was in 2018, and the result was a 19% correction in the Dow Industrials.
The Fed was too aggressive back then, but has been way too easy since flooding the market with new money supply to counter Covid-19.
The other issue is that the Biden administration is too inept to understand what needs to be done to offset the inevitable tightening. Biden is only fixated on his dead on arrival Build Back Better plan, which has no chance of passing this year, if ever.
In 1982, the Fed under Paul Volker embarked on a major tightening campaign to offset the inflation that was destroying incomes. Reagan countered with massive tax cuts, and the economy recovered quickly.
That type of response is simply not in the blood of this administration.
Well, this just means it’s time to find opportunities elsewhere.
I mentioned Gold the other day. Well, Gold broke out above $1,900 today on heavy volume and it now looks ready to climb much higher.
It is a bit extended now, so it’s not a good time to buy, but there will be more opportunities.
In the stock market, most of the action has been in energy stocks, and those are also a bit extended. I’ll be looking for opportunities to develop in the coming days.
Leave A Comment