Confirmation of Stock Market Selloff

Last weekend I explained how that week’s market decline carried many negative factors, but needed a second week’s confirmation to be taken seriously. That confirmation has happened. Here is the last two week’s selloff picture…

The last two week’s clear downside pattern not only confirms a weak stock market, it opens the door to the possibility of new bear market lows. After all, the many negative fundamentals continue to be in full force.

But, didn’t the 2022 bear market end? No

The so-called bull market was simply a rebound of sorts because last year’s worrisome predictions (particularly of a serious recession) became less dire. Also, the next bull market will have totally different upside drivers than the previous one. That is far from happening.

While the meme stock market fad has finally died, all the other areas continue to be active: investor-unfriendly SPACs, unproven biotech company IPOs, negative earnings story stocks, debt-ridden company IPOs from private equity funds, and overly simplistic stock ideas.

The next bull market will have nothing to do with those poor investments. Instead, it likely will be completely opposite, focusing on traditional fundamentals.

So, how do we get there? By having the market sell off further and washing out all those remnants of the previous bull market. Hard to imagine? Look first at these four graphs…

Clearly, the decline is widespread, and there is plenty of room to fall further.

Now look at the current S&P 500 valuation measures.

Despite weakening fundamentals and uncertain forecasts, the valuations are still near their previous good-times levels. Note, too, that dividend growth has not matched earnings growth. That can be a sign that boards have been reluctant to expect the earnings levels will be maintained.

But aren’t investors worried, so a contrarian position is to own stocks?

Yes, they are getting worried. The recent declines are the cause. However, “real” worry that produces widespread selling has yet to happen. While some articles say investors are fearful, surveys do not yet show it – nor does the stock market reveal it.

The view that the stock market is in a “correction” phase is more popular. Therefore, the possibility of a new “bear” phase is a valid concern.

The bottom line: Imagine a new bull market that has different drivers

With all the noise still about the last bull market’s drivers, this is a difficult task. It’s particularly hard to do when a bear market selloff could be in the offing. In other words, why correctly identify the next good thing and buy it now, knowing it, too, will likely be taken down in a broad market selloff?

So, the better tactic continues to be staying with cash reserves.