When Fear Overtakes Greed in the Stock Market

For the first time in a long time, fear is overcoming greed in the stock market.

The majority of analysts see the current decline in stock prices as a simple correction in an ongoing long-term bull market that has been rising since the tech boom in late 1999, early 2000. They hope on a daily basis that the correction in the stock market will soon be over.

Well, those market watchers should take note of several signification developments not boding well for the long-term health of stocks. Here they are:

Remember the inverse yield curve we experienced for months on last year? Historically, inverted yield curves (when short-term interest rates are higher than long-term interest rates) precede a recession. I was one of the only economists out there taking the inverted yield curve as an omen. Others probably wish they took this phenomenon more seriously when it happened so they wouldn’t be fully invested in stocks during the market meltdown we are experiencing.

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Smart money is not buying on rallies during this market downturn. In fact, they are selling into rallies. This trend has rarely happened over the past few years.

Wall Street, after months of shrugging off the hard landing in the housing market, is finally starting to take note of the recession in U.S. housing. Many homeowners and home builders are in trouble. Expect the first big bankruptcy of a major U.S. home builder to be announced soon.

There’s a credit crunch on in the U.S. Easy money is gone. Risky companies are having a difficult time refinancing. The good times for access to money are disappearing. Witness the stock prices of many leveraged buyout firms.

The Fed is not coming to save Wall Street this time. The Greenspan put? Well, it may have disappeared. Why should the Fed save Wall Street after investment firms have made so much money during the stock market run-up of the past few years?

Because of what I have described above, investors should see the current market downturn very different this time from past market corrections. Fear is setting in, and it is taking over from where greed left off. And while market bottoms are easier to call than market tops, the bottom is nowhere near (in my opinion) as fear in the marketplace only now starts to settle in.