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 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 .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...
"I investigate the industry-level responses of U.S. stock returns to unanticipated changes in bank lending standards, exploiting cross-industry variation in the levels of dependence on external finance. I document that, on average, cumulative stock returns fall significantly by 1.36 percentage points two years after an unexpected one-standard-deviation tightening in lending standards. Moreover, moving from an industry at the 10th percentile of financial dependence to one at the 90th percentile adds between 1.24 and 2.19 additional percentage points to this effect."
- Economics Letters, Volume 144, July 2016, Pages 92-97, by Author Norbert Metiu
Science, not idle speculation, i.e., 1.36% does not equal a market crash.
Btw, those are way bigger than one standard deviation increase in lending standards I'm taking about. Look at the chart. It's a massive move higher. Over one standard deviation is an event that happens in about 1 out of three samples--a third of the time. I'm pointing out a once in a decade spike.
The pain from handing out massive tax breaks to the wealthy and corporations while ignoring the working class is about to be realized.
That led to massive Corporate stock buyback programs and free Wealthy Elite investment money that should have went to the people in the form of taxes (largely overlooked in most bear cases), which both combined to wildly pump the markets.
That than led to devaluing our currency and begging for high inflation (from the very Conservatives who warned of the immense dangers of inflation for 8 straight years under Obama no less!) to keep the wheels from falling off.
This 4Y long Trump re-election charade won't last much longer, lets see if it pays off for them.