A Bear Market … when?

During the previous three weeks, the market action has been brutal to trade in at best and nauseating at worst, making it difficult to stay focused. 

It seems like prices have been all over the place recently. 

The S&P 500 index, on the other hand, managed to maintain a reasonable level of stability, while the damage beneath the surface was significantly greater. There is a significant portion of the S&P 500 index that has fallen significantly from its 52-week highs. 

New lows outpace new highs, bullish breadth is declining, and volume is low. 

Several factors, including distributions, option expiration, and tax-loss selling, have contributed to the market’s volatility over the past week. 

It does not appear that the economy is heading into recession at this time. In spite of this, the Federal Reserve continues to purchase bonds at a rate of $120 billion per month. In addition, the Federal Reserve is maintaining its zero-percent overnight lending rate, and the yield curve is still some way off from inversion. 

These factors, on the other hand, are subject to rapid change, and when they do, the countdown to the next recession and bear market will commence. 

Changes in Federal Reserve policy typically have an impact on the financial markets after approximately 9 months. The clock is ticking away. 

As is always the case, predicting when the market will reach its zenith is challenging. Almost all underlying fundamental measures have become increasingly disassociated with the stock market in recent years. 

“Don’t fight the Fed” and “liquidity trumps all” were two of the rationalizations used to support bullish psychology. Given that the Federal Reserve is reversing those monetary support measures, the bullish bias is also being weakened. 

Essentially, rate hikes and tighter monetary policy do not immediately result in a “bear market,” as is commonly believed. 

Investors ‘get trapped’ in bear markets because, by the time they realize what’s happening, it’s too late to do anything about it, which, unfortunately, is often the case. 

In a bull market, investors are led to believe that “this time is different.” 

That slow, arduous process begins when the topping process begins, and it is met with new reasons to believe that the bull market will continue. 

The difficulty arises when this does not occur. 

Bear markets can be extremely fast-paced and brutal.