This is an updated version of the multi-year topping pattern of the S&P 500 I've posted a few times now. The previous post is linked below in Related Ideas.
The situation today adds to the previous update... we've continued the massive rally, extending this historic bull market even farther and poking over the megaphone top. We've recently had some downside and fallen back into the pattern. The recent rally has extended the downside target of the megaphone pattern even lower. Interestingly the predicted downside target now points right to the lows of the 2000 tech crash and the 2008 financial crisis.
Do I still think we're headed into a bear market and likely below the bottom of the Megaphone? YES! There is no rational argument for the market continuing higher. Bull markets eventually die and bear markets are born. This is true even if the Robinhood traders are too young to have ever seen a bear market.
Despite a terrible economic environment due to covid, everyone is long and chasing momo-stocks like TSLA and AAPL expecting the Fed to prevent any downside. Everyone has so ignored the potential downside and are long on margin, that brokers have started forcing a bit of restraint recently by increasing margin maintenance requirements (which restricts lending to traders). A similar thing happened as the 2000 tech crash started.
In addition to the brokers tightening lending, banks are also tightening lending and that's an even bigger indicator of an upcoming bear market. To see the clear pattern of bank tightening into bear markets, below is a chart of Federal Reserve data on bank tightening going back to 1995. Every time bank lending tightening goes above 40% or so, there has been a bear market and related crash. This year bank tightening for loans has shot up to over 70% and yet the equity market hasn't caught on yet.
See an image of data at the below link (or go to fred.stlouisfed.org search on "tightening" and find it yourself). The blue and red lines are bank tightening standards for small and large firms. The green line is the Wilshire 5000 to show what the equity market was doing at the time. Look at what happens when we get bank tightening spikes--NOT GOOD:
https://imgur.com/a/9s3KqaT (click on the image itself to make it bigger)
So it's not just me who sees a bad economic environment, it's most of banking (including brokerages). And they are doing something about it--they are making it harder to borrow, reducing their own risk. These bank actions not only suggests a bear market is coming, it can cause a bear market. The reduction of bank lending takes money out of the economy (as banks are responsible for most of the credit creation into the economy) and that can CAUSE a deflationary contraction just by itself.
This is long term data, so there's no specific timing on this. But the tightening has already happened and has not remotely started to decline. The economy is only continuing along due to government stimulus. Once a bear starts the market can decline for years. I'm surprised the market hasn't already crashed, but IMO a bear market can arrive at any time. Anyone chasing stocks higher at this point (especially on leverage) is nuts, again in my opinion.
In addition all the indexes look like hell with obvious double tops formed or forming. But that's a shorter-term comment for another post...
The situation today adds to the previous update... we've continued the massive rally, extending this historic bull market even farther and poking over the megaphone top. We've recently had some downside and fallen back into the pattern. The recent rally has extended the downside target of the megaphone pattern even lower. Interestingly the predicted downside target now points right to the lows of the 2000 tech crash and the 2008 financial crisis.
Do I still think we're headed into a bear market and likely below the bottom of the Megaphone? YES! There is no rational argument for the market continuing higher. Bull markets eventually die and bear markets are born. This is true even if the Robinhood traders are too young to have ever seen a bear market.
Despite a terrible economic environment due to covid, everyone is long and chasing momo-stocks like TSLA and AAPL expecting the Fed to prevent any downside. Everyone has so ignored the potential downside and are long on margin, that brokers have started forcing a bit of restraint recently by increasing margin maintenance requirements (which restricts lending to traders). A similar thing happened as the 2000 tech crash started.
In addition to the brokers tightening lending, banks are also tightening lending and that's an even bigger indicator of an upcoming bear market. To see the clear pattern of bank tightening into bear markets, below is a chart of Federal Reserve data on bank tightening going back to 1995. Every time bank lending tightening goes above 40% or so, there has been a bear market and related crash. This year bank tightening for loans has shot up to over 70% and yet the equity market hasn't caught on yet.
See an image of data at the below link (or go to fred.stlouisfed.org search on "tightening" and find it yourself). The blue and red lines are bank tightening standards for small and large firms. The green line is the Wilshire 5000 to show what the equity market was doing at the time. Look at what happens when we get bank tightening spikes--NOT GOOD:
https://imgur.com/a/9s3KqaT (click on the image itself to make it bigger)
So it's not just me who sees a bad economic environment, it's most of banking (including brokerages). And they are doing something about it--they are making it harder to borrow, reducing their own risk. These bank actions not only suggests a bear market is coming, it can cause a bear market. The reduction of bank lending takes money out of the economy (as banks are responsible for most of the credit creation into the economy) and that can CAUSE a deflationary contraction just by itself.
This is long term data, so there's no specific timing on this. But the tightening has already happened and has not remotely started to decline. The economy is only continuing along due to government stimulus. Once a bear starts the market can decline for years. I'm surprised the market hasn't already crashed, but IMO a bear market can arrive at any time. Anyone chasing stocks higher at this point (especially on leverage) is nuts, again in my opinion.
In addition all the indexes look like hell with obvious double tops formed or forming. But that's a shorter-term comment for another post...
Comment:
The huge post election move has taken price just out of the top of the pattern again. But it's early in the month, we'll see how the month closes.
Comment:
The market is still moving up... and is now even more overvalued than during the dot-com bubble. However I think that's soon to change. It seems the momentum money has moved to crypto--Bitcoin has broken to new all time highs and is rocketing higher. Ethereum and the altcoins will follow in time.
The bull market in equities is over 10 years old and a bear is due. The bull market in crypto just started after several years of ugly bear. IMO you want to sell the old bull and buy the young bull.
The bull market in equities is over 10 years old and a bear is due. The bull market in crypto just started after several years of ugly bear. IMO you want to sell the old bull and buy the young bull.
Comment:
Looks like the turn might be happening. But we still have LONG way down to go.
