WASHINGTON. In our previous installment, we wallowed in the fear and loathing that’s been caused by October’s surprisingly nasty downturn in U.S. stocks. October’s feverish selling panic has gotten bad enough to generate serious bear market fears. This, in turn, begets more and more selling. Which, in turn, leads to margin calls, which leads to more forced selling. Fear drives U.S. stocks at present, despite a generally overall positive outlook for many companies, even as we dive more deeply into the usually productive 4thquarter (Q4), which still looks like a good one.
Bear Market Fears: Wall Street’s Halloween House of Horrors
Seeking Alpha– a highly useful, informative, but verbose and overly-optimistic investor website gives us a numerical summary of this week’s Wall Street House of Horrors.
“The S&P 500 visited correction territory after disappointing reports from Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG) added to the selling pressure built up earlier in the week. The S&P slumped 3.9% for the week, while the Nasdaq tumbled 3.8% and the Dow slipped 3%. The 10-year Treasury finished the week at 2.81%, while WTI crude oil settled below $68.”
ZeroHedge describes the carnage caused by the current Wall Street selling panic
The Tylers over at ZeroHedge, the financial internet’s lurid answer to the Drudge Report, drills in on the blood-dripping details of the past week’s carnage.
“The S&P 500 had dropped 15 times this month. That was the most for a full month since October 2008, when the world’s biggest central banks cut interest rates and U.S. money-market funds got a bailout.
“It’s been ugly:
“Dow down 9% from record high (down 4 of last 5 weeks)
“S&P down 10.1% from record high (down 4 of last 5 weeks)
“Nasdaq down 13% from record high (down 4 weeks in a row)
“Dow Transports down 15.2% from record high (down 6 weeks in a row)
“Small Caps down 15.8% from record high (down 6 weeks in a row)
“With all the major US equity indices languishing below their 200DMA…”
What a gloomy set of bears the Tylers are.
The charts provide graphic evidence of the market’s downward spiral
For those who follow charts, Carl Swenlin, an uncannily reliable chartist I’ve subscribed to since the 1990s. He’s now part of the Stockcharts.com subscription site gets even more specific about what the current charts are telling him.
“I normally don’t show an in-progress monthly chart because a monthly chart isn’t final until the end of the month, but this week’s market action was so severe, I thought that a ‘big picture’ view would be most helpful. The cyclical bull market rising trend line drawn from the 2016 low was decisively violated this week with a breakdown of over -5%. A ‘decisive’ break (-3% or greater) carries with it the assumption that lower prices will follow. This assumption is reinforced by the fact that the monthly PMO has topped and crossed down through the signal line (EOM pending).”
“There is horizontal support at this year’s lows, but the next major support is on the secular bull market rising trend line, drawn from the 2009 low. A decline of about -25% from the all-time highs would take price back to that line, giving us a pretty tidy cyclical bear market. I’m not predicting that, but it is certainly a possible outcome.”
Secular bull market vs cyclical bear: Definitions for those new to the game
A “secular” bull or bear market is a positive (bullish) or negative (bearish) market trend that can go on for many years. During such trends, however, there can be contrary and often violent sell-offs (in a bull market). Or buying panics (in a bear market).
If these contrary moves continue for a fairly significant amount of time without violating the longer term, secular bull or secular bear market, such moves, if relatively short, are regarded as “market corrections.” If they continue for a somewhat longer period of time – say, a month, two months, a calendar corner, and maybe even a bit longer – we might then label these corrections “cyclical bear” or “cyclical bull” markets or trends.
Carl is assuming that we may have a bit more to go on this current correction, alas. The S&P 500 and the tech-heavy NASDAQ have already plunged to losses of minus 10 percent or more, as ZeroHedge noted. Off by 9 percent from its previous highs, the Dow is ready to join them, perhaps next week.
Corrections are supposed to wrap up somewhere between the minus 10 and minus 20 percent marks. If we follow current charts, we’re now in the zone where the current correction could end. Assuming it’s not anxious to turn into a fullblown bear market, that is. That could occur if major stock averages continued to lose money past the negative 20 percent mark.
Correction, cyclical bear or secular bear? Crystal ball, please…
After that point, we might indeed be in a cyclical bear market. It would also confirm the current bear market fears on Wall Street. But so long as a potential cyclical bear doesn’t violate the secular bull market’s long-term trendline, it likely will remain a cyclical bear. In other words, the market could turn bullish again. It would do so by reversing its course and breaking through negative trendlines. If that’s what it actually does.
That explanation is a bit simplistic. But if I start going longer, web readers will yawn and find another page. So let’s stop the secular-cyclical bull and bear lesson right here.
I think everyone gets the picture. No one knows if the correction we’re enduring will end quickly. Maybe even next week. Or will it continue for awhile longer, thus becoming a cyclical bear marke? Or will the correction / cyclical bear market last long enough to morph into a secular bear market. That would finally reverse the recovery trend that’s been in place for a decade. Additionally, it would confirm those bear market fears. And there’s the rub, as Shakespeare might say.
We’re now in a situation that’s not providing easy answers. You and I as individual investors must now take an educated guess on what to do next. But we have little firm evidence to go on. That’s not a good place for investors to be. But sometimes, there we are.
Like it or not, it’s time explore the limited number of remaining alternatives we have in the current market scenario. And that’s what we’ll do in our next exciting episode.
Next: So what can we do in the current, miserable stock market environment?