Seven Reasons the Next Sustained Market Move is Down

After a nine month historical run up to the tune of 70% plus gains in the stock market. Let's look at seven reasons why I think the next sustained market move will be down: Home building, Debt, Commercial real estate, adjustable rate mortgages, Unemployment, Market sentiment & Corporate profits

After a nine month historical run up to the tune of 70% plus gains in the stock market. Let’s look at seven reasons why I think the next sustained market move will be down:

1) Home building by any standard has exceeded usual norms the last five years or so and we now have a large inventory overhang, decreasing existing housing sales and increased foreclosures, and multiple other problems facing home builders. Plus shadow inventory, it is basically banks and homeowners who want to sell properties but are holding homes off the market till the market bounces. Some estimates of this shadow inventory are staggering.

2) Debt, debt and more debt. Under Greenspan and Ben our debt to GDP ratio climbed from 1.25X to 3.25X. Stop and think about that stat for a moment. And it does not include the incredible debt load the government has added this past 18 months. Who will pay that debt and how is that debt going to be paid.

3) Commercial real estate. In the U.S. we have roughly 50% more retail space per person in this country than the second closest country. If you believe private real estate was overbuilt, you have not seen anything yet. Commercial real estate is still not near a bottom and it is incredibly overbuilt. We could be looking at a decade or more before this area of real estate comes back to where it belongs.

4) Adjustable rate mortgages (ARMs). A majority of the option ARMs are yet to reset. These are the private mortgages where the borrower can choose to pay just interest or even less. There is some sense that the low rates now will help, which they will, but when you are resetting from interest only or less to interest payments and principal payments on an increased balance, then low rates are not going to save you. A ton of these will reset from 2010 through 2012 and beyond.

5) Unemployment problem is still not improving; the good news is unemployment does not seem to be getting worse the 4 week average of initial claims has been on the decline. But no matter how the media spins it 400K-500K initial unemployment claims per week is not a sign of a turn around. Initial claims of 350K would signal some jobs growth and a net gain in jobs.

6) Market sentiment has become to optimistic. Recent surveys of economist’s predictions continue to be too optimistic. And sentiment of the individual investor, two weeks ago reached levels of optimisms not seen since 2007.

7) Corporate profits, the bottom line improvements for companies in the 2nd half of 2009 have been largely due to cost cutting (like layoffs) as opposed to increased sales and growth. This does not signal a recovery and a new run away bull market.

The Bottom line is fundamentals and the stock markets are out of alignment. The stock markets next sustained move is down; the stock market is over do for a correction of at least 10-15% that would take the S&P 500 down to a 1040-965 level.


  • Sam Cass

    January 27, 2010

    A 10-15% correction seems a bit conservative. I believe we could see 20-25% correction. The whole rally has been due to massive government spending. Government spending contributes 30% of US GDP.

    Your other points are well taken. I also just posted an article which stated that individual investors are shunning the stock market. Markets can't continue to go up just on hedge fund activity.

  • Anonymous

    January 27, 2010

    Sam I agree. 10-15% is a starting point. At that point we may see a counter move higher. But I agree a 25% plus correction / even another crash is in the cards for 2010. I think we will see the S&P down to the 850-875 level this year, which would be a 61.8% retracment of the bear market rally.

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