Over the past few weeks, I have found myself telling concerned clients and friends, "If you ain't scared, you ain't paying attention." The volatility in the stock market has become nauseating. This year, there have been six declines of 10% or more that have taken place in less than 21 calendar days. From 2000 through 2020, this only happened twice (2008 and the May 2010 Flash Crash). Now this year, it has already happened six times!
Thus far, whenever the stock market has declined, there has been a measurable bounce to follow. And these bounces have largely taken place towards the end of the month. This isn't by accident, it is by design. It is a phenomenon commonly referred to as "window dressing" or "painting the tape". These terms describe Wall Street's affinity for inducing a rally in stock prices at the end of a month or quarter knowing that it will improve the aesthetic of their clients' statements.
Even as ugly as this year has been, the markets have predictably seen a strong rally near the end of most months. The following table represents the ability of Wall Street to push prices higher in the short-term to appease their clients.
But stocks have failed to rally in any meaningful way this September. The inability of Wall Street to resuscitate the stock market as the quarter comes to a close, coupled with the news out of the UK that pensions have been undergoing forced selling, has me as short-term pessimistic about the stock market as I've ever been. If the news is reporting about UK pensions being engaged in forced selling, I can promise you that other parties are engaged in forced selling as well. Typically, news like this doesn't hit the wires until well after the carnage is over.
Next week, stock market investors will be receiving their statements. Given the relentless devaluation in bond prices coupled with stock market declines, many investors will be making a call to their broker insisting they do something, anything, "to stop the bleeding". Whatever it is these brokers do, who never saw this bear market coming in the first place, will just add to the already heightened level of volatility.
And of this is taking place in a time window where the stock market has proven to be the most vulnerable. Currently, the stock market is sitting on top of the two most critical months in an undeniable 7-year debt cycle. For those who may not be familiar, there is a debt cycle that goes back 3500 years and every single bear market for the past century, takes place during the final year of this cycle.
- The 2008 Financial Crisis
- 2001 Dot.bomb
- 1994 Recession
- 1987 Black Monday
- 1980 Gold spike
- 1973 Oil Embargo
- 1966 Forgotten Recession
- 1959 Recession
- 1952 Recession
- 1938 Inflationary Bear Market
- 1931 Great Depression
- The 1917 Bear Market
The most dire consequences of being invested during the final year of the 7-year debt cycle typically come to pass in the September/October timeframe, which is coincidentally during the High Holy Days of the Jewish Faith, upon which the 7-year debt cycle is based.
I don't have a crystal ball and I cannot say with any certainty where the stock may be headed starting next month. All I can do at this moment is to "read the tea leaves" and adjust accordingly. Where things stand now has me overly concerned about being in US equities which is why I am out of all traditional equity and bond holdings. We are holding some alternative plays which historically have shown little correlation to US equities.