Sir Isaac Newton mentioned what goes up must come down. So, does this imply what goes down must also come up?
The conventional wisdom is markets that rise too far above their equilibrium level will eventually return to their norm. It is akin to gravity pulling an object back to earth. The expression also refers to something good that will not last forever. All extended markets to the upside and the downside inevitably will return to their equilibrium over time.
Investors continue to contend with rising inflation, which is currently trading at 40-year highs. Russia/Ukraine debacle continues to create geopolitical turmoil. The supply chain bottlenecks and food/energy shortages continue to hurt corporations and consumers. Rising interest rates also threaten to derail housing, lending, consumer spending, and investment cycles. A Fed policy mistake can also trigger a recession, or worst, an economic stagflation cycle.
New investors have flocked into the financial markets over the past two years. According to the 2021 Charles Schwab study, nearly 20 million people have entered the financial markets for the first time. Approximately 15% of all US stock market investors began trading in 2020.
Many investors, including the new traders that started trading in 2020, have never experienced an economic environment of high inflation and high-interest rates, suggesting these investors are not prepared to navigate this new trading environment.
Meme stocks, SPACs, NFTs, and cryptocurrencies may have fueled a lofty stock market based on indiscriminate buying and high market expectations. Will indiscriminate selling and low market expectations now prevail?
Market indexes such as S&P 500 Index, Dow Jones Industrial Average, and the Nasdaq Composite Index recorded seven weeks of losses this past Friday, sustaining one of the lengthiest selling since 2001 and 2002 for the SPX and COMPQ.
When market indexes fall 20% or more from their recent highs, they have entered bear market territories. SPX and other indexes are nearing their bear market thresholds. Some investors believe the worst may be behind us. However, the enclosed charts show well-defined near-term downtrend channels in market indexes, including SPX, INDU, and COMPQ.
Although SPX has rebounded from its pivotal support at 3,810-3,837, coinciding with the 38.2% retracement from Mar 2020-Jan 2022 rally, 61.8% retracement from Oct 2020-Jan 2022 rally, and the 30-month ma, it may be an oversold rally.
Unfortunately, what goes down must come up may not come to fruition until the negation of the downtrend channels.