Denial isn't a river in Egypt - as I've contended for so many months while an evident distribution 'under cover of a Dow and S&P umbrellas' dominated, while insiders and others were systematically selling (and we were shorting) rallies all year long; and generally quite successfully as well. Now the drama magnitude, after running-into a 'brick-wall of resistance' as soon as gains could be sold in a new tax year, has turned temblors into essentially an eye-opening earthquake. 

Backing off 'financial engineering' - that lifted financial-asset-focused yachts; but barely the Middle Class dinghy's much less small cruisers; I've called this a 'Controlled Depression' (Fed facilitating the control by circuitous funding 'the Street' equity levitation amid an historic yield-chasing that we long cautioned all investors to be careful about lest they forget about the return 'of' their money in a quest for a better return 'on' their money) for quite some time. 

In 2015, aside the discussions about constant distribution under cover of a firm S&P or Dow Industrials, we thought it was superficially covering the use of rally periods to distribute shares to weaker holders; or to flat-out raise cash, which is what we suggest. Frankly a large part of the ongoing buybacks were viewed as a strategy to impress shareholders with artificially-boosted earnings (lower float of course), while insiders often used the equity lifts in the wake of buybacks for selling (in-essence executive compensation) with shareholders often carrying a lot more debt through bond offerings. Regardless, all part of distribution.

This summary (mostly for new members) is important; because many pundits in 'fantasy-land' pretend the recent rapid decline is 'shocking, unexpected, or just China-based', or other excuses they can find, other than observing correlation between reality-check facts I noted throughout 2015 of earnings or GDP growth steadily being ratcheted-down by the Fed (like Atlanta 'Now') or even the IMF. 

We've noted that the market started losing traction as soon as the Fed starting 'tapering' (simply less stimulus) without waiting for the Funds rate hike (frosting on the cake); which became merely what the public sees as monetary policy; a transition we assessed as the actual 'snugging up' beginning months earlier. 

In a similar vain, the preponderance of analysts saying this is a normal needed correction in 2016 typically omit it's seeding really in the Spring and Summer of last year (if not earlier for some sectors, including Energy). They try avoiding a discussion of the number of stocks under their 200-Day Moving Averages even before the near-term bottoms fell out of the S&P; and certainly don't focus as I have been prone to, on the New York Composite, which has been below crucial August and September lows for awhile now. 

That's the broad market; proving a big point I've made for several months: they focused whatever interest they were able to muster (mostly in-house leverage increasing risk) in an increasingly-narrow group of 'momentum' or market focus stocks (which impact capitalization-weighted indexes) to give an illusion of S&P or other index or average stability, to cover the actual retreat as was ongoing. 

My point is not so much to amplify that our assessment was valid, though sure it was; but rather to enlighten new members as to how the tactics worked last year; as the Street achieved (intentional or not) a not-unusual modus operandi of a charade proving as usual that the market is a 'discounting mechanism'. 

I'm mentioning that, as some media 'actually question' whether the market has lost all that as a result of the rapid decline in 2016. Not exactly. It was masked and evident in the 'breadth' and other internal indicators (bearish divergences) for months. And although for sure the Fed painting themselves into a corner as we said they were all year by delaying 'normalizing' rates (aside the economy for reasons we oft discussed), which allowed the preceding upside to remain at 'index-viewed' relative levitation for far too long. 

Bottom-line: during this levitation we thought it was obviously distribution; and obviously an economic underlying slowing from July forward. Discounting 'has' indeed occurred based on the distribution assessed. And furthermore, go back and look at late 1999 and early 2000; it took several months of speculative fast pumping (while scaling-out into that euphoria was the idea); or 2006-'07, when real estate was already being crunched and hungry money chased stocks, as we thought would occur 'for about a year', because funds always slosh around looking for somewhere to go. Then of course the 'Epic Debacle' occurred. 

(By the way it was thanks to a member here who sent a copy of a document by the Federal Reserve Secretary to Citi; allowing them to take down firewalls for the purpose of firming reserves at Smith Barney -now Morgan Stanley- as they were heavily holding non-investment-grade CDO's or derivatives, which meant they were violating net capital requirements. I saw that and elevated what I had already issued as a 'liquidity and credit crunch' warning to an 'Epic Debacle' or get-out-of-the-way call; because I connected the dots to see that many firms on the Street were essentially in a similar compromised position; and that the Fed was allowing the capital shifts to try to dissuade disaster. That's the exact topic nobody wanted to discuss in 2007; or during the first break's ensuing rebound, ahead of Lehman. Again the market 'did' know, and allow anyone who listens to the messages of the market to exit, which was again the backdrop to 2015.)

In sum: while I'll update a couple items below and in the video; there's nothing really occurring aside what we've outlined; other than please understand you'll hear from the media that it's a Bear Market only when the Index is down 20%; and of course far too late for any efficient sizable distribution, as was executed by those-in-the-know last year; as we suspected even in back-channel chatter.

All rallies should be false and abortive; and this process evolves as outlined. At this stage we continue holding a March S&P / E-mini 2065 short-sale guideline; with the expectation of a break below the Aug./Sept. lows whether a temporary holding action is again initiated or not.     

Conclusion: the overall decline can be deeper, whether we get a 'rate cut' (too much focus on the Fed; rather than the 'earnings and profits' recession) or QE revived (we think that would be foolhardy; and just rally the market briefly. This is now not merely about the Fed; hasn't been for a long time; but the Street did its best to hold the narrowly-led index up using that argument for months.

Hence; the overall outcome can be deeper, with the agony for investors that did not get it, or were unable to do anything to protect themselves, prolonged.         

Daily action - see's the S&P down hard; but still shy of the August lows; which is the point it transitions from filling the 'forecast vacuum' underlying Nov. / Dec. lows; to the lateral area of the Aug. / Sept. lows. Below that is what I've termed 'no-man's land', and is where we simply erode interspersed by rebounds, or at some point elicit the elusive panic that so many seem to believe must ensue. 

My contention has been that the 'ownership (or at least management) structure' of markets today, has most capital under control of fund or fee-based accounts managed in a way that typically tends to 'track' the Averages rather than really proactively protecting investor capital or being particularly heroic. 

That means, if one presumes only big redemption's create selling (or a further cascade); that so many managers will just sell what they have to (or can sell in downdrafts); but it has been my thinking that they will defer 'panic' as indeed is the case. Yes that makes it a fairly orderly (believe it or not the freaking-out so many call this is actually an almost daily systemic liquidation, slow-crash not a) series of flash crashes; and by no means a gut-wrenching selling-panic.

All of which extends the ultimate downside (which it should anyway considering how far beyond reality measures relative to earnings or household incomes the markets got to pre-topping earlier last year) and prolongs the ongoing agony for investors who embraced minimal potential and insisted on pressing for gains in the face of a sequence of failed rallies throughout at least the past year. 

This gives us a potential low that will be beneath what otherwise might occur. Instead of an 'acceptable correction' (how kind of managers to conceded that at this point); consider taking a look at how they always try to 'save the day' in the nick of time at give-or-take a 10% S&P decline; but now without Fed wind more than a breeze at their backs; and with everyone 'on to' the economic malaise; it seems this 'historic unwind' has a good bit to go as we've suggested. 

We don't like downside targets in what becomes 'controlled liquidation' with the potential to turn into a panic (hasn't happened yet but that part is out there); so we listen to the messages of the market. Last year the message was caution; this year it's ultimately going to be looking for value; but not jumping the gun. In such a situation of a prolonged advance as occurred without fundamentals; this has a risk of unwinding in a nastier way than just putting percentages or levels on it; so stay tuned. 

Whether the low is 20% off the high; 30%; 40% or the market's cut in-half (more is a theory a couple super-bears have in mind but let's see what happens a bit), we'll let the market (and the underlying basics) guide us along this journey. As to everyday life; since the market rally didn't lift most boats; they may not sink in theory so much with the decline. However, just as the Walmart closings note; lots of ramifications are being felt across the land; so it's possible the recovery in the market merely helped stabilize average families; who now suffer anew. I hope not; but it's important to consider. Housing is and will decline; auto sales as well; retail was and is in the pits as discussed; and the 'freight recession' as CSX put it; has been telegraphed (and shared here often) by the Baltic Dry. 

All in all investors should keep their powder dry, and traders gradually but not all at once harvest some gains. In the new week which is only 4 days; we may see a quick liquidation and another turnaround try; followed by new selling. At some point if the market is lucky; they'll get the second rebound effort even into the very start of February; but then likely down again. Let's finesse it more over time and meanwhile hope you enjoy the holiday weekend.  

We hold short March S&P / E-mini from 2065 (75% of total position remains after taking an enormous 130 handle gain at 1936 on a quarter.)