Deflation Continues As The Driving Force In The Stock Market

Mr. Bear has begun clawing back inflated market valuations in the stock market. The Dow Jones has deflated by over 6% since last Friday’s close; everyone can see Mr Bear’s handy work in the BEV chart below.


How have the other major indexes fared? The table below tells us what we need to know: market valuations in the broad stock market are deflating. The BEV column informs us how far these indexes have declined from their last all-time highs. Most of these indexes’ BEV Zeros happened sometime in 2018. However some predate 2018, for example the last all-time high for the NYSE Financial Index was on 09 May 2007, that’s eleven years ago.

The 02 Jan 18 column shows how these indexes have performed since the close of the first NYSE trading session of 2018. Most are down by double-digit percentages and none of them are positive for the year. I expect when I return from my vacation in mid-January they will all be down significantly more.

Seeing the NYSE Financial and NASDAQ Banking indices (#18 & 19) leading the other indexes down isn’t good. Remember the sub-prime mortgage crisis of 2007-09 was primarily a credit crisis in the global banking system. A crisis in the mortgage market placed at risk the entire global payment system. Had that system failed in 2008-09, economic activity such as purchasing gasoline, groceries and buying from your favorite internet shopping site would have become impossible. People would have stopped going to work as their employers could not have paid them for their labor.

Unfortunately the “policy makers” did nothing to fix the banking system. So, sometime before this bear market concludes, Mr Bear will once again attack the global banking systems’ payment infrastructure. If he’s successful in taking it down, it will be horrible; making this bear market as deep and as profound as the Great Depression Crash of 1929-32.

Is this possible? In our heavily “regulated” markets and financial system I expect anything to the downside is possible. One thing most market regulators have in common is a desire to leave government service and get a cushy job at one of the banks they currently regulate; the one thing that isn’t going to happen if they “regulate” the economy and financial markets too enthusiastically.

One shouldn’t complain unless one has a solution to a problem, and the solution to our current corrupt market regulation would be a return to a mark-to-market at the end of the day standard for the banking system. Illiquid assets like OTC derivatives and sub-prime debt should be prohibited assets for any financial institution that holds deposits for savers and businesses.

Below is an ugly chart; the Dow Jones in daily bars. We saw another Dow Jones 2% day on Monday. We could have had three or even four 2% days last week, but at the end of the day someone came into the market buying in volume, lifting the Dow Jones up above a -2% loss for the day.

It doesn’t matter, as this chart is screaming BEAR MARKET. Keep in mind the Dow Jones sees its largest daily percentage ADVANCES during big-bear markets.Large daily advances of up to 15% from a previous day’s closing price happened during the early 1930s, typically following a series of big down days as seen below.

So, if during my absence from market commentary, should Dow Jones see one or more huge percentage daily gains in the stock market, it’s only Mr Bear giving the short sellers their fair share of bear-market grief. After which he’ll be back doing what he does best; clawing back inflated market valuations from financial market assets.

Next is a chart of the Dow Jones (Blue Plot) plotted with its 200 count (Red Plot); the number of Dow Jones 2% days (days of extreme volatility) in a running 200 day sample. Rising daily volatility (rising 200 count in the Dow Jones) has been a hallmark of bear markets since 1885, and below you can see how a rising 200 count impacted the Dow Jones during the High-Tech and Sub-Prime Mortgage bear markets.

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Moon Kil Woong 3 months ago Contributor's comment

Deflation is not usually the term used for a stock market swoon just like you don't say there is inflation in the Dow Jones Industrials when prices rise. Asset price collapse or asset contraction is a better term.

Cynthia Decker 3 months ago Member's comment

Thanks for the clarification.

Mark Borkowski 3 months ago Contributor's comment

Many thanks to Mark Lundeen for his informative charts and commentaries. Bears can make money in volatile markets. Mr. Lundeen convinces us that we are in a down cycle. No doubt there will be some great buying opportunities, but on the whole we are heading downward for the short term, maybe longer. A question I learned in trying to sell companies to Walmart was, "how low can you go?" I would love to hear from others as to how low they think we can go before the Dow Jones and other indices stop bleeding?

Bill Johnson 3 months ago Member's comment

I'm becoming too afraid to answer just how low I fear this may go!