Market Plunge Baffles Wall Street, Really?

If you have been "MIA" over the past several days, you might be wondering what happen to the market this week, especially on Thursday. Thursday was the day that the DJIA had its biggest "intraday" point drop of nearly 1,000 in its history. For the week, the DJIA dropped 628.18, or down 5.7%, which was the steepest drop since the week ended October 10, 2008, in the midst of the financial crisis. Why? There were the usual excuses. The one that I really like is "somebody's wayward finger got in the way." The rumor goes that a trader error was the cause of the fiasco. That is, the trader had mistakenly entered an order for $16 billion, instead of $16 million. Then, of course, you have the Greece situation and our own debt woes, which were nothing new to the market.

I, for one, like to look at various technical indicators for possible clues for the drop. (By the way, I will update the exponential moving average strategy for the S&P 500 later today.) Several of these indicators are as follows:

1. Mutual funds currently show only 3.5% cash. Everything else is invested. This 3.5% matches the all time low, which occurred in July 2007. If you forgot about July 2007, that is when the DJIA plus Dow Transports made its all time high.

2. The VIX, a measure of volatility on option premiums, has been around its lowest level since May 2008.

3. The DJIA's dividend yield is 2.5%. The only market tops of the past century at which the dividend year was lower are those of 2000 and 2007, 1.4% and 2.1%, respectively.

4. The P/E ratio for the S&P 500, using four-quarter trailing real earnings, is 23, which is in the area of market peaks. As a point of reference, P/E ratios of 6 or 7 occur at major market lows.

So, where do we go from here? I believe, for what it is worth, that the bear market rally from March 2009 has ended. This bear-market rally was fueled by the FED's quantitative easing policy that injected close to a trillion dollars of liquidity into the financial system, which ended up in financial assets, like equities, not in productive loans to sustain an economic recovery. In other words, the FED's stimulative activities have been a total failure, except for Wall Street. Thursday's action (IMHO) is a precursor for further market declines. I will be taking some very defensive and bearish measures near term to position by portfolio for the ensuring bear market. As indicated, I will update the S&P 500 exponential moving average strategy along with some bearish ideas later this weekend.