Stock Market Might Crash This Year

Short Term Outlook

The sentiment picture in the market is so bearish that a bounce is to be expected.  There are some indicators as well that are in very oversold territory.  Therefore, on the short run, we can now expect a rally up to the 1358 to 1375 region on the S&P 500 to work some of these excessive readings off.  There is still an outside chance for the 1400 area but we will take one step at a time.

The scenario above is the best case in my opinion.  I want to stress that the market is extremely unstable right now and a waterfall decline is very possible if 1334 to 1324 region is not held up by the S&P 500.  Markets tend to create waterfall declines when they are extremely oversold and seem like they cannot go any lower.

Intermediate/Longer Term Outlook

I usually do not like making posts such as this because the term "Crash" refers to a very rare event that is overly used by some permabears.  Nonetheless, I feel like I need to make everyone aware of what I see in this market.  As this market moves lower, especially the DOW, it is becoming more apparent that this market has no intention of moving higher in any significant way.  Please read the entire post, I do not expect a "crash" type of event to occur immediately, but it is something that we need to be on guard for in the next few weeks to months.

I found it very troubling that the market did not even attempt to stage a rally today, nor did it when it dropped nearly 400 points last week.  This is massive distribution and a sign of a deeper correction in the works.  There will be a systematic flush that occurs in this market before any substantial bottom is put in.  This may not happen this week(actually I am sure it wont), but it will happen in the next few months.

We are in an intermediate term to long term BEAR market, see my post from yesterday, and you will see why I think that.  Therefore, we need to be on guard for sharp short squeezes and it could happen any time here.  The Dow is within the target range I suggested yesterday in the 12000 to 12100 area and therefore the downside targets on the short term have been met; however we may get a little more of a bump lower tomorrow as the S&P 500 has an open gap at 1334 which should get filled being that it is in such close proximity.

Bank Stocks

The bank stocks were (are) the key to this market. As the market moved lower in 2007 all the way into the Jan/March bottoms, we were led down by the banks.  The rally off of march was initially kicked off by the banks and then we saw a weakening of the bank stocks as the market was topping out.  This was a clear sign that the market was in trouble, its general was not confirming the highs we were seeing in the SPX at 1440.  Now, since that top, the market has moved fericiously down, and guess which sector is leading the charge?  You guessed it, the BANKS! 

I still have yet to see any bullish divergences setting up in this sector as we continue to get beaten down every single day.  MER closed at multi year lows today and so did a slew of other bank stocks.  This is very bearish.  Remember, cheap can get cheaper.  Don't try and catch a falling knife.  The fact of the matter is that the banks are in deep trouble and there are still very large writedowns to be taken by many of the big players.