We called this a bear market and named it “the Great Devaluation” — On January 22, 2022!

Our January 22 2022 newsletter said the following:


From the Book of Covid, Ch. 22:

And so it came to pass, on the twenty-second day of the first month of Omicron in the third year of Covid, that Plutus said interest rates would increase. Thereupon, a great wave of selling began, and it swept through the market and throughout the land. But the gurus did not believe the selling was real, and they urged the traders to buy the dip. And the traders bought the dip, and the market went up, but after a while, the wave of selling continued.

So the traders became fearful and began to sell, and their selling begat more selling, and the selling spread to the quants and then to the institutions and the hedge funds until the market crashed, and they had no more to sell. And then, Fortuna led the traders out into the desert, and they were heard from no more. And that time was known henceforth as The Great Devaluation.

The stock market had its worst week in two years. Of the major averages, the Dow declined least (4.5%), the S&P 500 fell 5.68%, the NASDAQ Composite fell 7.5%, the DJIA lost 4.5%, the Russell 2000 declined 8.1%, and almost everything ended the week in freefall mode as January monthly options expired. Even energy and financial stocks fell.There was just no place to hide.

Forget about what you thought your stocks were worth for the last several years. Who thought Zoom would decline by 75%? Okay, maybe some did. But who thought the Disney would lose 30%? Or mighty Amazon would decline by 22%? The doomsayers have been warning that stocks were overvalued, and the market ignored them for years. Up until the end of last year, they were wrong. And we drank the Kool Aid. We thought the bull market would go on forever.

So many analysts were saying that we are in the first inning, the second inning, the fourth inning of a bull market. The economy is great, consumers are buying, inflation is transitory, earnings are increasing, the pandemic will end, etc. It’s called “positive thinking”. But positive thinking will not make it so. And now, it’s starting to look as if the bears were right, and the market was wrong.

All the projections of sales and earnings are based on things continuing as they have been into the future. And all that has to happen for that to be wrong is for consumers to change their mind. If consumers stop spending, the market will crash. The market will crash because earnings will stop rising. And when consumers stop spending, they also stop buying stocks.

But what about stocks that don’t depend on consumers? Like Microsoft. Even that stock is down 15% from its high point. Why? There are many reasons, but one stands out in my mind, and that is, most stocks of any size are all more or less tied together because they are major components of indices, and therefore when other stocks in the index decline sharply, the index tracking money managers have to sell all the stocks in the index as money flows out of the fund. And that affects all the stocks in the fund.

Even stocks that benefit from higher interest rates can be affected negatively, like financials. One headline in Barron’s says to buy Goldman (GS) on the dip. My advice: Don’t do it. Goldman is sliding down a slope. It is a falling knife, and until it turns around, it cannot safely be bought.

The red candlestick is outside of the 3 standard deviation lower band, otherwise known as “free-fall”.  There is also a sell signal (Under EMA exit). In the second subgraph, money flow is falling sharply, and a new trend downtrend is beginning. This is also supported by the DMI- cross above DMI+ in the bottom subgraph. The only “positive” in this chart is that CCI declined to the max, -249, and is likely to bounce back next week. But if it does, it is not a buy signal. It will take many weeks to recover from the technical damage, and there will be sellers all along the way.

The Fed hasn’t even begun to raise rates, and is still buying billions of dollars’ worth of bonds every month, so why now? In short, it’s because markets typically act well in advance of events. Commonly, markets will react to an anticipated event when it first appears on the horizon.

The Fed meets next week and despite everything that’s happening, it is considered unlikely that it will change anything at this meeting. Why doesn’t it act more quickly? Because it is afraid of spooking the markets. So now, all they have to do is say what they intend to do, and the market reacts as if it is done.

What will the Fed do now? It has hardly begun to act on the most recent policy announcement, and already the market is in near-panic mode. Will the Fed really raise interest rates aggressively in the face of a market in correction mode? That is the trillion dollar question.

The FOMC is on the horns of a dilemma. They have to raise short-term rates, because all the longer term rates have already increased substantially. But they don’t want to crash the economy, and they don’t want to crash the stock market, and they can see what is already happening just from the anticipation of rate increases.

But no one is anticipating a crash in the economy. It’s about higher interest rates, overvaluation of assets, out of control inflation, economic slowdown caused by the Omicron Variant, and declining consumer confidence. The behavior of the stock market is in large part a reflection of consumer confidence. When confidence is high, we spend money on goods, and we also buy stocks. And vice versa.

A lot of last year’s gains have disappeared, and that is making folks worry. Not to mention the fact that Russia looks like it is about to start World War III.

The key interest rate on the Ten-year Treasury Note interest rate began the week at its highest point since 2019, and ended the week slightly lower 1.747%. The rate may be moderating slightly, but the trend remains higher.

Those who insist that rising interest rates are good for the stock market were less vocal this week as they saw their favorite stocks get crushed along with the rest of the market.

Even the “Value stocks” tanked this week. SPVU ETF, which had been doing so well, dropped 6.15% this week . Our admonition not to chase a fast market turned out to be prophetic.

The S&P 500 was far above its intensely watched 200 day moving average line last week, but dropped through it, although it is still above my 252-day moving average line, which I stubbornly insist is more reliable. Last week I said if NASDAQ dropped lower, there will be blood. It did, and there was blood.

The S&P 500 chart went bearish last week, and the downtrend intensified.


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