Is the Stock Market About to Crash?

Short answer: I don’t know, but it certainly looks bad right now.

This is the S&P 500 chart right now, over the past 2+ years:

You can see a very clear uptrend that began around May 2020 and was just now broken.

I do expect to see a near-term bounce just based on the fact that the index is oversold based on RSI, but I don’t know that it’ll be built to last.

But the S&P is only about 7% off its all-time highs.

The tech-heavy Nasdaq looks even worse. It’s more than 12% below all-time high levels:

There was a steep uptrend from the March 23, 2020 bottom that ran until being broken in February 2021. Then a new, flatter uptrend began and was just recently broken. Now the Nasdaq sits at ~14,150, which is right where it bottomed in October 2021, and where it topped out in both February 2021, and then later in April 2021.

That Feb/April 2021 resistance is now serving as support for the market, but if it drops below that level, it will probably stay there. Again, as with the S&P, I think we see a bit of a short-term bounce here just because of how oversold stocks are, but I don’t know if it’ll be built to last.

It just looks to me like the Nasdaq index is in the process of rolling over. It’s no longer in an uptrend, it’s in a sideways trend, now sitting at February 2021 levels, and is on the verge of entering a downtrend.

The #1 thing to understand about down-trending markets is this: dip buyers get destroyed.

In an uptrend, dip buyers are rewarded. Uptrends look like this:

The dips get bought, and the market ascends to new highs. Dip buyers make money.

But a down trend looks like this:

Dip buyers get wrecked.

The defining trend of a bull market is that the dips get bought.

The defining trend of a bear market is that the rallies get sold. Everything gets flipped on its head.

If we start seeing rallies that get viciously sold, we’ll know we’re in a bear market. It sounds pretty obvious, but it’s a critical distinction. People will be compelled to buy the dip, but dip buying doesn’t work in a bear market. Dip buyers get slaughtered in bear markets.

There’s a few stocks I want to highlight right now to show you that things are a lot worse for many individual stocks than the broad market indexes are showing.

Let’s take Lockdown Darling Peloton (PTON). Today, Peloton announced they were suspending the production of their expensive stationary bikes. I have been bearish on Peloton for over a year now because I’ve always thought it was a pure lockdown play. Once the gyms opened back up, Peloton became an insanely overvalued stock. Some would argue it became basically worthless, and it’s hard to dispute that given the stock has crashed by over 86%:

This thing went from $18 a share at the depths of the Covid bear market to over $170 a share by January 2021.

Now Peloton trades at $24 a share.

Netflix today just announced its earnings report, and while it reported rising profits ahead of Wall Street’s expectations, it still shows declining subscriber growth.

Netflix was beaten mercilessly with a rubber hose in the after hours trading, falling more than 20%:

Netflix was up over $680 not a few months ago, now it’s around $400 a share. Just a bloodbath.

Cathie Wood’s ARKK Innovation ETF is now down over 52% from its February 2021 high of $160 a share. ARKK is the poster child of high-flying “tech bubble” stocks. Its biggest holdings are Tesla (9.56%), Roku, Teladoc, Square, Zoom, Shopify, Spotify, Twilio and Coinbase.

Tesla is still doing fairly well–it’s trading around $1000 a share right now, down quite a bit from its November peak of over $1240 a share, but, it’s still up massively from where it was at the bottom of the Covid bear market of March 2020, which was about $70 a share.

But if Tesla starts crashing, watch out, folks. It will drag down the S&P 500, as well as the many firms that are heavily invested in it.

  • Microsoft has been one of the strongest stocks of the past decade, basically going straight up the whole time. This time 10 years ago, Microsoft was trading at about $26 a share. Today it’s trading at around $301 a share. But it peaked around $350 in November, meaning it’s now down close to 14%.
  • Even Apple is off over 10% from its all-time highs, hit just a couple of weeks ago in early January.
  • Amazon, which has basically plateaued since July 2020, is now down 20% from its November all-time high level.
  • Google is down 12% from its November all-time high.
  • Nike is -20% from its November all-time high.
  • Home Depot is down 17%.
  • Disney stock peaked back in March 2021 and is currently down about 27% from those all-time highs.
  • Facebook peaked back in September and is now -17.6%.
  • Visa is off about 15% from its July 2021 high, but as recently as early December was off about 25%.
  • Moderna, the vaccine maker, peaked around $500 a share in August 2021. It now trades at $167 a share as of today, a collapse of over 67%.
  • Even Pfizer is down about 14% from where it was a month ago.

Momentum stocks (MTUM) in general are down almost 16% from their November peak.

The New York Stock Exchange index (NYSE), which contains thousands of stocks and is basically the broadest US index available, is only off about 5% as of right now, although it has been trading flat for about 9 months right now. So, there are still some healthy stocks out there holding up the rest of the market.

But if they start faltering, this whole thing will go into freefall.

Goldman Sachs recently pointed out that just 10 stocks basically carried the market in 2021:

Further, over 35% of the market’s gains in 2021 came from just 5 stocks: Apple, Microsoft, Nvidia, Tesla and Google.

The Russell 2000 index (IWM), which tracks small cap stocks (i.e. smaller companies) is usually the first to collapse because the companies that comprise it are less financially stable and solid. It is currently down 18% from its November 2021 high. It now sits at December 2020 levels after largely trading sideways for a year.

The Russell 2000 actually looks poised to enter a nasty freefall:

It’s sitting at a critical support level right now. If this level doesn’t hold, the Russell 2000 is going off a cliff.

So why is all this happening right now? Why is the stock market panicking and looking like it’s about to collapse?

Well, stock valuations are insanely high right now. The Shiller P/E ratio is higher than it has ever been other than a few months in late 1999/early 2000 at the height of the Dot Com bubble:

It’s at 37 now, but it was at 40 not too long ago.

This is a problem in and of itself–sky-high stock valuations–but it’s even more of a problem now that the Fed is about to be hiking interest rates.

Basically, the only justification for stock valuations being this high has been that interest rates were at zero.

But now that’s about to change.

The Fed is going to take action to combat inflation. Rising interest rates mean slowing economic growth. Actually, they usually equal recession, but not immediately.

Interest rates are spooking the market right now. The market will have to adjust to a higher-rate environment, and that means stock valuations will have to come down. This is a painful process.

Legendary investor Jeremy Grantham, who is now 83 and has over 50 years of experience, has been calling the market a bubble and predicting a collapse for over a year now, and he still maintains that this thing is going to crash:

… we are in what I think of as the vampire phase of the bull market, where you throw everything you have at it: you stab it with Covid, you shoot it with the end of QE and the promise of higher rates, and you poison it with unexpected inflation – which has always killed P/E ratios before, but quite uniquely, not this time yet – and still the creature flies. (Just as it staggered through the second half of 2007 as its mortgage and other financial wounds increased one by one.) Until, just as you’re beginning to think the thing is completely immortal, it finally, and perhaps a little anticlimactically, keels over and dies. The sooner the better for everyone.

The rest of the Zero Hedge article on the current state of the market:

Having seen the same pattern that played out in every past super-bubble is what gives [Grantham] so much confidence in predicting this one will implode similarly.

Echoing what we have said since 2009, when the view was largely contrarian and has since become consensus, Grantham puts the blame for bubbles of the past 25 years on bad monetary policy. Ever since Alan Greenspan was Fed chairman, he argues, the central bank has “aided and abetted” the formation of successive bubbles by first making money too cheap and then rushing to bail out markets when corrections followed.

Now, Grantham warns, investors may no longer be able to count on that implied put. He says that inflation running at the fastest clip in four decades “limits” the Fed’s ability to stimulate the economy by cutting rates or buying assets…

“They will try, they will have some effect,” he added. “There is some element of the put left. It is just heavily compromised.”

Under these conditions, the traditional 60/40 portfolio of stocks offset by bonds offers so little protection it’s “absolutely useless,” Grantham said. He advises selling U.S. equities in favor of stocks trading at cheaper valuations in Japan and emerging markets, owning resources for inflation protection, holding some gold and silver, and raising cash to deploy when prices are once again attractive.

“Everything has consequences and the consequences this time may or may not include some intractable inflation” Grantham writes. “But it has already definitely included the most dangerous breadth of asset overpricing in financial history.”

Here, we disagree: yes, there will be a crash, one which will send deflationary shockwaves around the world, but it will only prompt an even bigger rescue by the same Fed which no longer has an alternative after it crossed the Rubicon in 2020 and bought corporate bonds and junk bond ETFs to avoid an all-out collapse in the post-covid turmoil.

This is important to consider: a lot of people are predicting that the current inflation will soon turn into deflation as wealth is destroyed by the market crash.

In the next crash the Fed, whose only contribution over the past 100 years has been to make the rich richer and create an epic “wealth effect” bubble, will buy stocks and ETFs, transforming into the Bank of Japan, before eventually it loses all credibility. But by then, stocks will be orders of multiple higher, completely disconnected from reality and fundamentals and trading only on the quadrillions in liquidity central banks inject to preserve the western way of life.

Incidentally, the question of what happens after the next crash is one that was posed just yesterday by another market bear, Stifel strategist Barry Bannister, who predicts a market drop to 4,200 in Q1 2022, but wonders what happens post-correction, when he writes that “equities risk the third bubble in 100 years if the Fed loses its nerve and cancels much of the tightening plan.

We doubt that occurs anytime soon, because we believe bubbles are exceptionally poor policy, and the prior two equity bubble tops (1929 and 2000) were followed by “lost decades.”

I’d argue two lost decades followed the 2000 bubble.

We do not doubt it at all, and are absolutely certain that the Fed – which has no choice but to blow an even bigger bubble after the coming market crash – will do just that.

The only question we have is how much of a crash can the Fed weather before it capitulates, i.e., what is the level of the Fed put. We are confident that another 10-20% lower – which will obliterate Biden’s ratings and [ensure a] Republican avalanche in the midterms, surging inflation notwithstanding – and the market will finally discover what it is looking for.

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