I wanted to get you an update from last week on what I am seeing in the market. I titled today’s writing with a question mark. The media is calling this January decline all types of things from market crash to a simple correction. They might both be right.
The Market is in a Simple Correction
Let’s explore that argument for a moment. Even in bull markets (when the market is going up) the stock market can decline 10% to 20% and resume its bull market. It is a normal function of the stock market. A correction is defined as a decline between 10 and 20% and there have been plenty of them in the history of the stock market. There is nothing unusual about the decline or the length of time that the decline has occurred. It could be nothing more than a simple correction.
The Market is in Crisis
Let’s explore this argument for a moment. Most of the time this opinion is generated due to the over sensationalism of the media. The media loves sensationalized journalism and will refer to a 5% loss as a crash.
Having said that, there is something unusual with this stock market decline not seen since the financial crisis. When the stock market goes into a decline phase whether it is a correction or a full bear market (greater loss than 20%), the old saying is that the stock market doesn’t fall in a straight line. There are periods during the decline where the market will recover and go up instead of down. Maybe it is a period of 1 day or as many as 4 or 5 days. There is a break in the selling.
The market is literally falling in a straight line. That is not a good sign and it is not acting normal. Yes, the crashing price of oil has something to do with it. I think the picture is much bigger than that. The stock market might be waking up to the potential scenario that we are heading for a recession. There are many signs that are pointing towards that scenario. The stock market has ignored many indicators for a while now. Reality seems to be hitting Wall Street.
The worst thing about a recession this time around is that the Federal Reserve Board has no ammo to pull the economy out of one. They have used all of their weapons. So what I am watching? Always watching the price of level of the market. The first red line below was my initial warning level that something was wrong. The stock market fell right through that level this morning. Then there is the next level down further below. That is the bear market line in the sand.
When the market is not acting right, the market is foretelling that something is wrong. It is wise to pay attention.