Bearish as Ever

The market is approaching the conjuntion of a line formed by the 1929 and 2000 tops and a line formed between the post-QE1 top and QE2 top. The latter line served as resistance for the tapering of QE3 and for the current QE 4 taper, as this line has held since the Fed announced the taper (despite increasing QE!)

Could I be wrong? Of course! But right here, I'm as certain as I can ever be in the markets that the Federal Reserve will, however temporarily, follow through with a taper and rate hikes for a time. If not, then I'd rather own crude oil futures than the S&P 500.

Assuming I'm more right and the Fed somehow loses control in the next downturn, or is unable/refuses to intervene because some combination of the U.S. dollar, crude oil and interest rates prevents them, then I expect a low somewhere below the 2000 level. Similar to the 2s10s ratio chart I've posted before, I see the market waves since 2018 as created by the failure of the Federal Reserve. It painted itself into a corner by doing QE for far too long. There was a meltup in 2018 that caused the bank to think it was safe to reduce its balance sheet. Then it chickened out after a 20 percent correction. Then in panicked in September 2019 and started up repos again. Then came the early 2020 when the pandemic probably interrupted another topping process. It then created the largest move yet.

Going back to the start of QE in December 2008, the stock market has moved in lockstep with the Fed's balance sheet except between November 2016 and January 2018 when the Fed's balance sheet was stable and the Trump tax cuts boosted corporate profits. After that, the stock market and Fed balance sheet "reattached" and have been linked ever since.

Take an extremely simplistic view of the market and assume all S&P 500 gains that tracked the Fed's balance sheet are unsustainable and will be lost, that leaves about 100 percent return for the S&P 500 Index from its December 2008 level, which projects to arond 1800. I suspect a test of the 2000 and 2007 highs, closer to 1500, could mark the low for a real bear market. I therefore expect a bear market low would be around 1500 to 2000 on the S&P 500, or a 58 to 67 percent decline in the nominal S&P 500 Index.