It's the beginning of 2016, and the market is showing strong signs of a coming Bear (fall in the stock market).
You've heard me say that Belief drives the market. And that's true for normal situations. The big drops in the market are from something else. There have been many large-scale drops in the stock market and the common item among them is a lack of money supply.
Many people are familiar with the 1929 and 2008 market failures. And the average person believes the failures are with lack of confidence. Others are saying things like "an expected correction".
A real expert, Martin Fisher, wrote a book on this topic in 1932 "Booms and Depressions". He also points to lack of money supply as being the key to smaller failures like 1907.
The great earthquake of 1906 in San Francisco is the only other variation in market crash reasons. Actual assets being destroyed. The net value of a company would be lower because the asset side of the books were diminished. And revenue from railways, for example, would be interrupted also. These are fair valuations for the company and aren't hocus-pocus stories about corrections. And the market only dipped strongly due to the Earthquake. It wasn't a big crash.
During the 1920's, the government was increasing the money supply like crazy (sound familiar?). And in 1929, the money supply started tightening up. Of course, things would have coasted along for a while. However, the big wall street moguls had the expertise to pull the money out while the market was still in good condition. There were many investors buying "on-margin" and when the market fell, they were forced to sell immediately. The mad sellers were stumbling over each other to sell to a small supply of buyers with money. Naturally it crashed.
In 2007 the market had realized there were many bad assets on the books (like 1906). And the money supply wasn't good either because many portfolios value were based on some "good" assets. This happened before Quantitative Easing was started in the USA. The goal was to encourage money to stay in the investment markets. Cash from large investors tends to find shelter in safe havens when a specific market is going bad. The money doesn't disappear. It just goes elsewhere (like leaving Japan in the mid 1980's). It might not return to that market for a very long time.
Indeed confidence and belief play a factor in a market, but cash is still King. No money, no buyers. People have real needs like paying the mortgages or college for their children. The stock market is a nice-to-have, but unnecessary and unwanted during a personal financial crisis.
To understand the market better, think of it like the human body. If there isn't enough blood (money) in the veins, the body becomes lethargic and sickly.
That bring us to the beginning of 2016 and that's different than the fall of 2015. Here we have a head-and-shoulders pattern forming on the monthly charts for SPY (the movement of 500 stocks). That pattern is simply a high-price that is lower than the previous high-price. This chart shows SPY going back from 2015 to 1993. The rise and fall of the market over the 23 years is easy to see.
Here is another chart that shows a close up of 2007 to 2015.
I've added a purple arrow on the left portion of the second chart at the point where the small rise was NOT higher than the previous high point. A good clue that the market has turned to Bear tendencies. I don't need to know "the reason" for it. That it's happening is the important factor.
The red star on the right marks where the market fell in 2014. It also reached that same point in 2015, but didn't proceed lower. Although many advisers were crying the market was a full bear market, the chart didn't agree.
The next rise was higher than the previous. All is still a Bull market. The difference now is that we are testing a new low and the high didn't reach (or even try to reach) the previous high. That is how the chart tells us something clearly, even when advisers have different opinions. This fall in the market is different than 2015 and 2014. The "high" didn't meet or beat the other recent high. If the market falls much lower in this week, I will expect a bear market for the next several months (or years). Only the money supply will help inflate the market again.
However, since the Federal Reserve announced a rate hike in interest, the money supply won't be here to save the day for the market.
My confirmation of the Bear will be that SPY doesn't reach $213 again in the next two months. SPY could break lower than $198 in January 2016, would mean the next few weeks would go lower for a while. That's just a short term view. The longer term (multiple month view) confirmation would be not reaching $213 again.
