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I'm not one to toot my own horn, but I do just want to observe that so far, the bear market that I believe began in January is proceeding right on schedule.
I pointed out in early February that stock prices had inflated by an astonishing 24.9% over the 12 months ended Jan. 17, leading to an all-time record overbought reading on the Composite Liquidity Indicator (CLI). That upside extension even exceeded the degree to which the market was oversold versus liquidity at the February 2016 bottom. We therefore knew then that the market was in an extreme buying panic – a mania – from September through most of January. I said then, "That leaves a lot of room for a decline."
And as it turns out, I was right.
The early February break was the start of it, and we are probably now in the second phase of that market decline and in the very earliest stages of the first leg of a major bear market. The inflation rate of stocks has already dropped from that shocking 24.9% in mid-January to just 10.4% annual change in the week ended March 23. I expect the 12-month rate of change to turn negative later in the year.
As I wrote in early February, "The level of overextension of stock prices from the liquidity trend reflects an extreme degree of risk of rapid deflation of the stock market bubble." That overextension has barely begun to be corrected. The risks remain high.
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Let's take a look at my secret weapon, the CLI, and see what it's telling us about our next steps.
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About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.