I have been writing articles over the past few weeks showing indications that the market, specifically the SPDR Index (SPY) was heading toward a pullback. There were too many negative factors in our economy, and today (Monday) the first major backwards step was taken.
Articles have been written saying that this is nothing more than the Monday morning blues, I believe this is just the start. I have spoken about our Debt vs. GDP, the debt ceiling, and the bollinger bands showing it was time for the market to ease back. But there are new factors to consider as well.
Sequester: The days inch closer to the March 1st deadline for our government to (hopefully) come to some sort of compromise on how to start to balance our budget. Unfortunately, it seems to be a word that neither Democrats nor Republicans can understand the meaning of. Our president is asking for Republicans to compromise, yet what exactly is he doing to compromise as well?
Should the automatic budget cuts go into effect, jobs will be lost, programs cut or trimmed down and overall the growth of our economy (which has not been growing enough to keep up with the rising debt to begin with) will slow. Some seem to think a sequester will slow the economy by up to 0.8%. Also an overall uncertainty will come over the market with more sellers than buyers a very good possibility going forward should there be no agreement in time.
1500 and Falling: The S&P (^GSPC) has had a solid resistance point at 1500 for quite some time. After falling almost 2% today to finish at 1487, it is below that resistance point (and still falling after-hours). Since closing at 1353.33 on November 15th, the index has grown over 13% in just over 3 months. Did you really expect no pullback, especially with the factors I have mentioned before (unemployment, GDP estimates lowered, national debt, and spending) all pointing toward a decline?
Europe: Our market is based on the buying and selling of stocks. When confidence is high, you have more buyers than sellers which in turn sends the prices higher. With troubles (still) brewing in Spain and now Italy, any more uncertainty in Europe will have a negative effect on our markets as well. Global uncertainty tends to spread globally. This was shown as today the Volatility Index (VIX) better known as the "fear index" jumped 35%. As mentioned, when people are not confident, they pull their money out, hence more sellers than buyers, which causes prices to decrease.
Injections: For some time now, every month the Fed has been injecting $85 billion into the bond market. The problem? The money is not real, it is artificial. It does not exist. As the highlighted shows, the injections are nothing more than building up a market artificially.
The problem with this is the same as injecting steroids into an athlete. When you stop the injections (there have been rumbles about this already) you lose your muscle, or in this case the value of the stocks decrease. To me it sounds like a Ponzi scheme, nothing more. The Fed cannot continue these injections forever. Do not be the one looking for the last chair when the music stops.
So the bottom line is, where is the bottom line? A 5% decrease? 10%? More? In my opinion it is a tedious market at best, and the bottom will remain unknown. Should we get a perfect storm and all of these factors stay relevant with no change, we could see a meltdown similar to 2008-09. But in all reality, I will stick to my guns and say that I believe the S&P will see 1400 again before 1600.
Disclosure: I am long AAPL.
Additional disclosure: I am short SPY