Origin of the Market Top

Steve Kanaval  |

"All assets naturally re-price themselves, no government can affect this. All assets naturally re-price themselves, no government can affect this. All assets naturally re-price themselves, no government can affect this." I've been saying this phrase to myself like a mantra for the last week as I watch the news and review market action. I say it to myself as a reminder of where the market is going.

 Momentum in nearly all markets stopped in December 2014, and the last two years has been nothing more than an elongated top. They take this long to build. They are an iceberg with an enormous base underneath the water line that few notice or care to see until you hit them.

I do not want to review the myriad of fundamental reasons the market is turning. This becomes a tedious exercise in balance sheet wonder and Federal Reserve policy, and I think it is a combination of just a few simple factors. The main factor is the Fed needs to raise rates immediately and this will send markets lower.

 But for those who are new to bear markets, markets need to pull back. We will see exacerbated moves each new trading day in September 2015 and that is indicative of this market top. Uncertainty breeds volatility, and investors are unsure of the direction. When the volatility stops, the markets will go down.

 I think it’s important to talk about what the next few years will be like for investors and identify the current state of the market. We put in a top in December 2014 to the final day of that year and declined 12% in the recent sell off. We have another 38% to go.

Normally, these change in directions approach 35% to 50% during the decline periods, and I fully expect US-based indices (I use the SPY to follow macro markets) to have a volatile top (which we will have through Thanksgiving 2015), a rolling decline in prices and index values through the Election in 2016 and 2017, but, again, these are not bad things.

 Stocks like Facebook (FB) and Google (GOOG) and other FANG names will outperform the market,  but the long marches many of the other stocks in the S&P 500 have made since the 2009 bottom have ended, and will decline 40 to 60% or more.

 Again, this is required by markets to weed out the dogs. As an investor, developing your skill set in picking stocks will be required. The dart board toss will not work. We are no longer in a momentum market. The other thing you will notice is that the S&P500 eliminates stocks from its Index when they don't go up, so this gives you a false reality when it comes to tracking stocks over time. The stocks included the Dow 30 change all the time.

Why is This a Top?

I point to very simple cycle timing as we end the QE printing press, and I fear as soon as corporate America stops buying back stock, the demand side of the picture will peter out. I also think as we get closer to the 2017 inauguration we will put in a bottom, but the next year will be as uncertain for investors as they will ever experience. Investing is always a challenge, as confounding as it is rewarding, and the upcoming Bear Market will be as much of a challenge as the previous ones.

I suggest you refocus on smaller less volatile stocks, stay away from short cut ETF’s, ignore the CNBC rants and focus on understanding a sector that you like. Let investing remain your deep dive treasure hunt into the ocean. Come away with something each dive and record what you found. The water is always blue and cool with so much below the surface to be discovered!


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Symbol Name Price Change % Volume
FB Facebook Inc. 145.01 0.51 0.35 18,091,978 Trade
GOOG Alphabet Inc. 1,061.90 -1.78 -0.17 1,329,201 Trade


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