Technical analysis is warning of further lows if January remains weak.
The US stock market rebounded strongly from the pandemic-induced market crash of March 2020.
From lows near 17,500, the Dow Jones Industrial Index has seen highs above 37,000.
The gains have stalled recently and I warned my subscribers in the weekly newsletter that caution was needed at these levels. Selling has now set in and there is a risk of further, sharp losses, if the index remains bearish into the end of January.
The real risk here is that the market is being rejected by the resistance that links the 2009 lows to the 2018 highs. There is potential for the market to test the 50 moving average near 28,500.
And if we are going to see the 2009 lows come into play then the Fibonacci retracement levels are sitting at 25,000 and 21,750 for the 38% and 50% corrections.
Will we see a 50% correction? Well, it’s possible, because the dynamics of the last two years, or decade, are changing.
Why Are Stocks Under Pressure?
The stock market is swooning because the central banks are removing the ‘punch bowl’. Decades of low interest rates led to near-zero rates at all of the key global central banks, while they also flooded the market with liquidity in the form of stimulus measures.
This has led to inflation running at 7% in the United States- the highest in almost 40 years. In Europe, inflation is also higher than 5%. These are unheard of numbers for the market after more than a decade of targeting a 2% inflation level.
The Federal Reserve will meet this Wednesday and while markets do not expect a rate hike until March, we cannot be certain.
Market Valuations were Stretched
Wall Street legend Carl Icahn has said that soaring inflation won’t change his investing strategy, but he still believes some stock valuations are too high.
“I do think that the way it’s going, there’s going to be problems with inflation and a number of other things,” he told CNBC in an interview. “But I certainly don’t let it bother my investment philosophies, activism, and I just keep going.”
The Icahn Enterprises boss, has an estimated net worth of $23 billion, and when asked whether he thinks there are bubbles in the stock market, or whether it might be inflated, Icahn said: “Yeah, very much.”
“I do think that some of the multiples are crazy, that some of the investments are just out of this world.”
Netflix Inc. was one victim of this overvaluation with the company missing on subscriber numbers and the stock lost 20% in one day.
War drums are beating in Europe
The next risk for stock markets is a potential invasion of Ukraine by Russia. Ambrose Evans-Pritchard, writing in the UK’s Daily Telegraph said:
“Markets seem not to believe that Europe is close to the largest military conflict since 1945, even though the US president tells us that such a breakdown of the international system is more likely than not, and could happen as soon as the ground freezes hard enough for an armoured invasion of Ukraine.”
Any such move could rattle markets in Europe and send ripples to other continents.
Conclusion
Will the stock market crash in 2022? Well, what is even a crash? A move in the Dow to 25k would only be a 38% retracement of the cycle from the 2009 lows. It would be met with cries of doom but would only be a correction in the uptrend.
The stock market always gets carried away in an uptrend and ignores glaring risks, but those risks are coming closer into view and traders’ trigger fingers may be getting itchy. If we see a bearish January close then we could get further selling in the stock markets.
