It appears the major stock market indexes have set their highs this past year. The collapse of breadth, number of stocks participating, supports this view. The extreme sell-off in the last few weeks is the kick-off to an impending bear market. But first we are due a bounce in stock prices into January. The oversold levels recorded this past week also support that view.
Let’s consider the energy market first. West Texas Intermediate peaked just over $84 in early November. It then plunged to the recent August low near $62. That is a 26% drop. Remember a 20% drop in any market is considered entering a bear or down market. Still a big reversal occurred Thursday with a range of $62.43 to a close of $66.50. OPEC and Russia are said to increase December production by 400,000 barrels a day, a literal drop in the USA demand of 20 mbpd. The 200 day moving average stands at $69.85. Exceeding that level will be a most important test of where oil prices will range in 2022. Last week we wondered whether we should worry about inflation or deflation given the lows in oil and commodity indexes. We consider FED Chair Powell later in the column.
Major stock indexes including Industrials, NASD 100, and SPX all hit new highs in early November and then retreated in dramatic fashion. As mentioned frequently in previous columns, the internals for these peaked months ago in February. Over 85% of the NASD stocks were above respective 50 day moving averages then. Today the figure is 23.15%. That is a dramatic reversal from the near 60% recorded in early November. This suggests a much larger sell-off lies ahead as the leaders, electric cars and FANG group, finally succumb to selling pressure.
The most reliable indicator is the advance decline line for the New York Stock Exchange index. It reversed again at the early November highs and fell through its moving averages. In summary look for a reversal back up after the first three days of December trading, which ends today. I doubt we will see new highs in most averages. Transports had a spike high and then dramatically reversed which also supports this view.
Our Lost in Space award goes to FED Chair Jerome Powell. He finally abandoned his ‘transitory’ inflation claim and sputtered around in Congressional testimony this week. Inflation at 6% is three times the FED target of 2%. Arkansas Senator Tom Cotton opposes his reappointment. The US Dollar from 2020 to 2021 fell from 104 to 89 and has now bounced to 96. Look for a reversal in the near future, again Powell is not defending the Dollar.
Finally I am reading comparisons to 1973 which ushered in a 50% correction in the stock markets. Then as now, the President is unpopular. Joe Biden turns 79 amid questions about his cognitive ability. Congress is polarized to the point of strict party line votes. The US exited the longest war ever in Afghanistan, similar to Viet Nam. That retreat emboldens Russia and China. Gasoline prices are high and inflation is cited as a major problem Oh and the stock markets made their highest ever peak in 1973, just as they have in 2021. We will monitor these events in coming columns.
