The Stock Market Stepped Into Bear Territory Last Week – Temporary Visit?

Another downer week, only worse. Thursday morning’s secure-looking barriers gave way in the afternoon. Friday blipped up then continued Thursday’s fall, failing to fill its role as opposite day. (Charts at the end of the article show the action.)

The broad, strong declines signaled a move into bear territory, regardless of the percent-below-peak calculations. However, there is hope because one week’s dramatic move doesn’t necessarily define a trend.

A convergence of factors can occur in a week that makes everything look magical or horrible. But then comes the respite – a weekend of calm contemplation. By Monday’s opening, investors will have determined whether the previous week’s drama was appropriate or overdone.

Will “overdone” be the conclusion this time?

It would make for a nice rise. For stockholders, a sign that this selloff may be an over-and-done adjustment. For cash holders, a sign that some of those bargain-looking stocks may be good buys.

However, there remain important, negative fundamentals that still indicate the stock market is facing more stormy weather.

Moreover, the coming week has three events that have the potential to shake things up. (Consensus forecasts from the Econoday 2022 Economic Calendar):

• Wednesday (Jan. 26 at 2 PM EST) – Federal Reserve Open Market Committee issues action announcement following its Tuesday-Wednesday meetings (consensus is no changes), followed (at 2:30 PM) by Fed Chair Jerome Powell press conference (no consensus – this is when market-moving comments could be given)
• Thursday (Jan. 27 at 8:30 AM EST) – GDP 4th quarter 2021 real (inflation-adjusted) annualized growth rate (consensus is 5.7%)
• Friday (Jan. 28 at 8:30 AM EST) – Monthly (December 2021) change in personal income (consensus is 0.5% rise) and personal consumption expenditures (PCE) (consensus is -0.5% decline), along with year-over-year PCE price index change (consensus is 5.8%)

A negative sign: Strange comments about the stock market’s declines

There was a worrisome oddity last week: Lackadaisical reporting of the week’s fall and, especially, of Thursday’s ominous turnabout.

From the Friday print edition of The Wall Street Journal, “Stocks Erase Gains on Late Selloff.”

“Stocks fell on Thursday, as a late-afternoon selloff erased what had been an early rally, showing that investors are still concerned about the prospects of tightening monetary policy and slowing growth.”

That drop did more than simply erase the morning gains. The DJIA rose almost 500 points in the morning, then fell 800 points. Worse, it broke through the oft-mentioned 35,000-barrier level.

It’s not just the media that failed to see the seriousness of the Thursday reversal. So, too, did two investment professionals mentioned in the article (underlining is mine):

Professional #1

“The afternoon selloff wasn’t surprising, said Sameer Samana, a strategist at Wells Fargo Investment Institute. Even after the recent pullback, selloffs usually need time to find a true bottom. Moreover, on a day like Thursday, it’s likely some traders decided to sell into the early gains in order to cut some of their losses from the prior selloffs. ‘This is just how markets bottom,’ he said. ‘It just takes a few days.‘”

It’s always a mistake to attribute stock market moves to competitive Wall Street traders suddenly acting in lockstep. Moreover, saying that market bottoms are similar and that they last just a few days is absolutely incorrect.

Professional #2

“’I don’t see a whole lot in the market that is really alarming me. There is no one out there saying ‘run for the hills,’ but there are those saying they are going to take off risk and reposition to other areas of the market,’ said Kara Murphy, chief investment officer of Kestra Holdings.”

It’s correct that there is not widespread, public alarm. But, if there were, that would be a positive contrarian sign that the bottom was near. In addition, it’s incorrect to say that “no one” is warning of a possibly large selloff. There are always investors and professionals who foresee what is likely to happen.

Professional #3

In the article, there was one investment professional who stated an appropriate view of this market:

“’Whenever we see equities churn lower, as they have this year, we are mindful that the risk of a meltdown grows rather than diminishes,’ said Nicholas Colas, the founder of analytics firm DataTrek Research.”

Will a meltdown happen? It’s uncertain, but there is a decently high probability that it could, making caution (and cash reserves) a sound strategy.

The bottom line – Next week could produce one of three scenarios:

1. A reversal of sorts, offering hope that the selloff is ending
2. A sideways move, likely volatile, that maintains the negative, uncertain view from last week
3. Another down week, causing increased concern and doubt (this is where “meltdown” takes on a higher probability)

Whatever happens, holding cash reserves allows an investor to form a better view and understanding of what is happening – plus the resources to take advantage of opportunities that pop up.

Four stock market charts that show last week’s notable descents – DJIA, S&P 500, Nasdaq Composite and Nasdaq 100