Markets getting mauled and this Bear ain’t stoppin’

We’re only three weeks in, but it’s been a hard year for investors. 2015 wasn’t all that much nicer. We’re not used to all of this volatility and market decline. We’re accustomed to the market going down a few percentage points, the media telling us to buy since it’s low, and within a few weeks or months the market settles down and we’re back up. Phew. That was nerve racking, but we were never anxious. We KNEW the dip wasn’t meant to last. How did we know? History of course!

We’ve heard it, we’ve read it, and we “know” what to expect — for better or worse — based on historical performance:

• 2–3x per year hunker down for a dip of 5–10% — what a cute little bear.

Awww what a cute little bear market of 5%

• Every 2–3 years be ready for a harder hitting 10–15% correction — we had one five months ago in August and we’re in the midst of another.
• Every 3–4 years we really get our teeth kicked in with a correction of 15–20% — we experienced this type of correction 4 years ago in August 2011 (-18%) and one year earlier in June 2010 (-17%).

This bear is a bit bigger, a bit scarier, and bit angrier…10–20% angrier

• Every 5–6 years we get a correction so deep, 20% or more, that everyone starts going crazy and the doom and gloom sets in — we should all remember the last time this happened…does the financial crisis sound familiar? Between October 2007 and March 2009 the market went down more than 55% from peak to trough.

What I imagine the investor psyche looks like during the big corrections

Why I think we’re in the midst of a bear that’s inching ever closer to investor hysteria.

• Dividend Yields on the major indices are extremely low.
• P/E ratios for all the major indices are extremely high.
• Major indices are well below key moving averages on accelerated selloff trading volume.
• M1 & M2 money supply is showing slow growth and more frequent declines.

Money supply charted over time with recent reports showing slow growth and even decline

• Banks’ net free reserves have been decreasing.
• The Federal Reserve raised the target Fed Fund rate and discount rates for the first time since 2010.
• Volatility is on the rise as more stocks are going outside of their 52-week low range — on January 11th more than 15% of all stocks traded on the NYSE and NASDAQ made new lows.

We may very well be in the middle of what is just another 10–20% market correction.

The indicators listed above and a handful of others, however, lead me to believe otherwise. There’s no telling how much lower the market will go, but there is definitely still room to fall. I for one will be sitting on the sideline until the dust settles and until I am more confident in what the market and the global economy have in store...and when that happens I’ll be ready to invest.

DM me on Twitter if you want access to a spreadsheet that includes the above indicators and more, which are updated monthly. Whether you agree or disagree if you have thoughts on the market let me know in the comments or inline notes.