The US stock markets have enjoyed a dazzling year, levitating to a long series of new record highs. But this relentless advance has stalled in August, with selling pressure mounting. Even most of the bulls readily agree that a material selloff is overdue after such a mighty run. But actually the odds are high this necessary retreat will extend well beyond normal pullbacks or even corrections into a new cyclical bear
The mere idea of a looming stock bear is certainly heretical these days, but this is not surprising. By early August, the flagship S&P 500 stock index (SPX) had powered an astounding 152.7% higher since March 2009! Being so deep into such a spectacular cyclical bull has naturally left speculators and investors very complacent. Most have forgotten that markets don’t move in one direction forever, they flow and ebb.
Still, late in mature cyclical bulls the ever-rising chances for the birth of a new cyclical bear are the last thing traders want to hear. So let’s shelve that controversial thesis for now and start at common ground. Nearly every smart bull either expects a material stock-market selloff or thinks one would be very healthy. And technical and sentimental indicators are nearly unanimous in declaring the SPX very overbought.
Discussing all of these would require a sizable tome, but here’s an overview. The SPX is stretched far above its trailing 200-day moving average. Complacency is extremely high and fear non-existent as measured by key sentiment gauges. 2013’s SPX levitation has been on low and dwindling volume and narrowing market breadth, with fewer and fewer individual stocks maintaining the rally’s momentum.
Students of the markets can elaborate on these major topping indicators in depth, and expound on dozens more. So the bears and smart bulls alike definitely agree that some kind of material selloff in the US stock markets is either already underway or imminent. The only real questions are about its ultimate magnitude and duration. The difference between a down day and a bear market is simply one of degree.
This is reflected in how material stock-market selloffs are categorized. Anything under 4% is merely a series of down days without any formal name. When selloffs extend from 4% to 10% off their preceding highs, they are called pullbacks. Once they forge over 10%, they become known as corrections. And if the selling continues long enough to push them over 20%, these selloffs become cyclical bear markets…….
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