If the stock market were to go into a bear market, we can
look for key price levels that can help determine where the bottom is. We will
look at the Dow Jones, S&P 500, and the NASDAQ Composite.
The S&P 500
There are two key levels to look at here. The higher one, is
around 1,500. In the early 2000’s the dot com bubble peaked around there, and
the bubble burst. During the housing bubble, the index made it to about the
same level, and the bubble burst. However, since then we have gotten to a new
peak around 2,100.
1,500 was a resistance level, meaning the price reached it
then fell back down. After it passes through resistance you can begin to look
at that level as a support level. So, that is why this is the first key price
to look for.
The second level is the support level that was created after
both of the bubbles both popped. That level is 700 – 750. This level is a
strong support because both of the bubbles ended at this level. So, if the
index falls through the 1,500 level, we would look for it to keep going to
about 700-750.
The Dow
The Dow looks a little different. It does not have a key
resistance level like the S&P 500 does. We can look at the previous peak
before the housing crash for a key level that may be tested, and that is about
14,100. However, that level has not been tested yet, so the real level to look
at is around 6500 – 6650. I think it is more likely to go down to this level,
for reasons I will explain after we talk about the NASDAQ Composite.
NASDAQ Composite
The Nasdaq is actually a different ball game. It has
actually just reached its peak from the dot com bubble this year. So, this
means that there is a resistance around 5,000. The key level to look at here
would be 1,300. That is the bottom of the dot com and housing bubble.
Price Conclusion
I believe that the lower levels of support are where we are
headed. The reason is because that is where all three indexes have a support.
They all have the same support level at the bottom of the bubbles. It is
because all three agree at those levels that makes the support so strong, and a
likely place for it to stop.
There are many reasons why this bear market can cause these
prices, but here are a few key reasons:
- China slow down
- National economies across the globe are on the brink of recession
- Commodities prices are falling: Oil, metals, food, etc.
- The Fed
China
The Chinese economy is shifting from a manufacturing
economy, to a services/consumption based economy. This has led to a slowdown in
the Chinese economy, which means that international US companies are losing
sales in China. China has tons of people, so companies were doing well there, so
lower sales mean lower profits.
International
Around the world, economies are on the brink of recession.
By definition a recession is two consecutive quarters of negative growth. This
means that people are not spending money, like they should, in order to keep
the economy afloat. Of course, less spending leads to lower profits and lower
stock prices.
Commodities
Commodities are all falling, which is actually putting us at
risk for deflation. Companies that sell commodities are losing lots of money as
the prices fall. Mining companies and things of that nature will lose money
because the prices are cheap. They lose money because the cost to mine does not
change, but the price they can see at does.
This also can lead to deflation, as it becomes easier to buy
more things with less money. This is a problem for stock prices because they
act the same as buying a loaf of bread. They become more expensive or cheaper
based on inflation rates. If everything goes on sale, so do wages and so do stocks.
The Fed
The problem with the Fed, is that they have built this
economy on a false foundation. They have kept interest rates artificially low,
which has spurred growth, but that’s the problem. They interacted into a
natural process and have only prolonged the bubble. They have essentially
expanded the economy, and fought against previous bear markets. If you look
throughout history, you will notice that you cannot prevent a crash, you just
prolong it and make it worse. I believe that is what the Fed has done.
The stock market has been pushed up because of low interest
rates. The low interest rates have made bonds look like lackluster investments,
and has made other investment vehicles look bad as well. Because of this,
people have taken money out of those investments and put them into stocks; the
more money in stocks, the higher the prices go.
Now, remember this is not natural. So, we can expect that in
order for things to be natural, they need to take money out of stocks to put
back into bonds and other investments. Once rates go back up, people will start
looking for bonds and stuff. This will take money out of the market, which is
why I think it will fall to the lower levels. The higher levels were the
highest the market has ever been naturally, so I do not think falling to previous
highs will be good enough for the market to bottom.
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