Q&A_ Is Dow Jones and global markets ready for a freefall_ 2?Namaste!
I have been pessimistic about the bull market since Oct 2022 when Dow Jones fell into bear market for the first-time (i.e. closed below 20% levels from all time highs).
S&P500 has been closing below 20% bear market level in June 2022, Sep 2022 and Dec 2022 respectively. (Please read earlier article of the same name which I posted on 7 Nov 2022).
There are mainly 3 reasons I strongly think that market have a pending correction of more than 30% from all time highs.
1. Fastest bear market recovery since decades: You know, bull markets and bear markets have some unique behavior which they follow very often. Bulls move price very slowly upwards. but bears move prices very very fast on the downside. What do you think, about this quick recovery of the bear market (year 2020 recovery). This isn't a behavior of the bull.
Well this has happened mainly due to following reasons:-
A. Lowering interest rates near zero by the US Fed to stimulate the economy, again.
B. They deposited dollars directly into the pockets of it's citizens. Money had to go somewhere. So, it (money) went in "spending" (resulting in profits numbers for corporations), "investments" (real estate, various assets and stock markets), etc. "Spending" fueled demand in the economy, creating the inflation (which is highest since decades) in many countries.
C. They printed around 33% dollars by issuing government bonds to US Fed (a way of introducing more dollars into the economy).
D. Most of this money doesn’t exactly go into circulation within the public and remains electronic. The US government technically owns these assets(stocks, etc)/treasuries and they can always sell them back to the banks when the current prices match those of pre-March 2020. Hence, the money was created as a way of making a buffer that allows the economy to absorb losses while it recovers (source: mediumdotcom).
The US government will eventually sell stocks in it's portfolio and other assets to the banks, investors, which will lead to Dow Jones falling.
2. Breakout in the interest rate cycle of US Federal Reserve rates (refer "https://tradingeconomics.com/united-states/interest-rate"). Interest rate has been kept "close to zero" since the sub-prime loan mortgage crisis in the year 2008-09. If the dollar in the market is very easily accessible due to very low interest rates (like borrowing from banks to buy a car, home, spend on unnecessary things, etc), it stimulates the economy by increasing demand .
It's a good step for the growth of Economy, BUT it creates inflation (sometimes out of control, sooner or later), since everybody is demanding the limited goods or services by borrowing from the banks.
Central banks come here, and increase the interest rates. Now, since the interest rate is higher, people will have to cut the spending (mortgage loan payments, credit payments, etc) and immediately stop borrowing more.
The inflation is around 4 decades high in US, and couple of decades high in UK, India, Etc. To counter this, central banks will keep increasing interest rates to withdraw "easy dollars" from the market.
Concluding, US Fed interest rate above 5.5% may cause the next bear market.
3. Double-top pattern (in the making):-
The black horizontal line indicates a 20% (bear market) level. As you can see in the charts, it has created a bull flag pattern. Breakout above the pattern can take the index to 36450 or test the all time highs. The market need some levels (or history) to take the next decision. Market will form a double top pattern before falling. Every trader whether retail or institutional, is a human. So, we need some levels (based on history and facts) to guide us for the future step. That's why Double top or double bottom pattern works so nicely.
What can happen next? Well, the market can breakout of the bull flag (& symmetrical triangle) pattern to reach 36450 levels. The person (traders as well as investors) who were in a hindsight because of no visible top, will try to book profits/exit the market near that level.
Concluding, Dow Jones is in a medium term uptrend till that level.
Disclaimer: The above article is based on my understanding and experience in the markets. Please do your own analysis and/or consult your financial advisor before investing or trading. The sailing in the markets without knowledge and risk apatite could be hazardous for who don't know swimming or without life jackets.
