The stock market closed out this week with a very bearish pattern, it looks as though the slide will continue, and may accelerate into a full blown 1929 style drop and shock. It may be even worse, considering that computers control much of the trading and that the market is in the stratosphere from Fed QE pumping.
Come next week, post Labor Day 2015, trading will resume on 08 September 2015, and the market could easily slide taking out the previous low set on 24 August 2015, the day of the record setting 1,100 point drop on the opening bell. When the market reverses course and starts a new direction everyone pays attention to the highs or lows to determine trend. That 1100 point drop low is all to critical.
Many people are not yet decided about the new trend – there is still plenty of hope left – they think the low is in and the market will resume upward. It might but that is unlikely. Why? Because there is a way to tell when trends reverse – especially the last change in course – the Volatility Index (VIX) made records.
The jumpy VIX is just like a nervous gunfighter who’s itchy finger quivers to get off the first shot. No one wants to be left behind, sitting on stocks when the market starts down. We all know that the two emotions controlling market trading are fear and greed, and when the market stops to drop the ugly greed can suddenly turn uglier – into fear.
Imagine an approaching tsunami – you see the first wave but don’t believe it. That is exactly what is happening now, like a deer frozen in the headlights, investors aren’t believing what they are seeing. It may already be to late, you may not be able to get out.
Fear is a more powerful emotion, millions of years of evolution have conditioned us to panic, when we see the lion coming from across the plain – we run for cover, no time to think, just act. Same with stocks – fear can turn to panic on a dime, and the rush to sell and get out can be an overwhelming force that crashes the market.
So what is the potential of this crash? Huge! The market has been pumped by billions from QE free money – and the borrowed money has never been higher. Interest rates plumetted to zero over the last few years now they are starting up again.
Junk bond rates have clearly turned, here is the HYG (High Yield) index illustrating the falling off the cliff point – just like 2008-9 we are at the edge of the cliff. What’s junk worth in the crash? Nothing.