Stock Market: What the Worst Start to the Year Ever Is Really All About

Bear MarketWhile analysts blame this year’s collapse in stock prices on what is happening with the Chinese market, this is not the real reason the stock market is crashing.

In the first four trading sessions of 2016, the Dow Jones Industrial Average has lost 910 points, or 5.2%. It’s the worst start to a year ever for the Dow Jones Industrial Average.

Long-time readers of Profit Confidential know where I believe we are with the stock market. To quickly recap: a 20-year bull market in stocks ended in late 2007, when the Dow Jones Industrial Average peaked at just over 14,000. Following that…

A secular bear market then started that took the Dow Jones down to 6,440 on March 9, 2009 (this was Phase I of a bear market, often called the “takedown”). A bear market rally in stocks then brought the Dow Jones Industrial Average to 18,351 in 2015 (Phase II of the secular bear market, often referred to as the “sucker’s rally” or a “dead cat bounce”).

Phase II of this bear market has been prolonged by the intervention of the government and the Federal Reserve. Back in the early 1930s, after the 1929 crash, the sucker’s rally (or dead cat bounce) was shorter in duration because we didn’t have such intervention. When you hear today that the Japanese government is buying ETFs directly on the stock market or that the People’s Bank of China is pouring billions into its equity market and banning people from selling or shorting, that intervention only delays the inevitable.

Phase III of a secular bear market brings stocks all the way back to a point between a) 50% below the original Phase I low and the dead cat bounce high (in this case 12,395 for the Dow Jones Industrial Average) and b) the Phase II low (6,440 on the Dow Jones Industrial Average in this case).

In these pages, I wrote extensively last year on how the stock market spent 2015 putting in a major top for stock prices. In retrospect, this now looks accurate. Phase III of the secular bear market I explained above could well be underway here in 2016.