The purpose of the market is to make fools of as many men as possible.

What a February it's been so far.  Bubbles popping galore. Crypto bubble pop, weed bubble pop, short VIX bubble pop and perhaps ETF bubble pop. Markets have taken quite the dive and we got the fabled 10% correction that so many have been calling for since the summer. While there is certainly concern out there, I don't get the sense of doom like in previous corrections and that's a big problem. The message that seems to be out there is "relax it's just a correction the economy is fine". Sorry, but that's not what long term bottoms look like. "Now is a time to hunt for bargains"says Cramer. Not what long term bottoms look like. Fed chief Dudly calling the drop "small potatoes". Not what a long term bottom looks like. Trump calling the drop "a big mistake". Not what a long term bottom looks like. That's what you call complacency. What you need is fear.

Throughout this bull run that began in 2009 there was usually a wall of worry for it to climb upon. There was always some concern, some issue that kept people from fully embracing the market and that wall of worry is what a healthy bull market needs to climb upon because concerns/worries  keep expectations low and as they get resolved the markets adjust by moving higher. Coming into the new year that wall was crumbling as the prevailing consensus was that it was blue skies ahead as the global economy was experiencing synchronized growth. Near the most recent peak, the market got extremely overbought on multiple time frames, sentiment as per AAII and other measures were at extremes and there was a surge in fund flows. So, has this 10% correction cleared out these extremes? Not so, at least not yet. There has been a pullback in bullishensss and there was a decent outflow last week, but I don't think that's enough. If we are to assume that the bull market is still in tact, before it's ready to resume its upward march on a sustainable basis I expect to see the opposite of what we saw at the peak. I expect to see bears outnumber bulls 2:1, major outflows and the permabears coming out of the woodwork claiming that the bull market is dead. Notice that the permabears have been fairly quiet. Where is Roubini? Where is Prechter? Pretty quiet  now after having their asses handed to them for 9 years calling a crash at every turn.

The other question I ask myself is "did we see actually see the bull market peak"?  Not all the signs were there but some were. Most bullish strategists seem  to think ""there's no inverted yield curve and so not to worry about a recession and therefore major decline in the market". As the motto of this blog goes, the purpose of the market is to make fools of as many men as possible. Once there is a consensus about something there will come a point where too many people are positioned the same way and eventually Mr. Market pulls the rug from underneath their feet. Major declines always catch the majority by surprise. So maybe we don't get a recession but we do get a major decline anyways like in 1987. Or we do get a recession and a major decline? Either of these scenarios would catch the herd by surprise.

In the short term the market is oversold enough to have a rebound but I would be very careful in assuming that it's anything but a dead cat bounce  until we have seen the extremes that marked the top get completely reversed. I don't know how long that could take. When you start seeing headlines saying "the bull market is dead" and people are fleeing from stocks that's when you'll know a real bottom is close.

The good news about the crytpo bubble bursting

It's clearly game over for crypto. I said before that the sooner the crypto bubble pops the better. News about crypto ETFs being pulled and credit card companies beginning to ban it is a GOOD thing (although I was hoping for  an ETF rollout so that I could buy puts on it). The longer this crypto mania would have continued the greater it would have infected the general economy when the inevitable collapse happened. Hopefully the fallout to the economy will be minimal although it's tough to say at this point how much unwinding of leverage and capital destruction this will result in. I for one will NOT take this fallout lightly. I really need to find out what kind of damage this has resulted in.

If that was the bull market peak...

Major selloff this week. So, was that it? Did we just witness a blow-off top to cap this 9 year bull run? Well, I've been saying repeatedly on this blog: Bull market peaks are made when there is tight money and euphoria/greed. There was definitely flashes of the latter with the bitcoin craze and weed craze which I think are over, but we didn't see tight money because inflation, although picking up, is not a problem at this time.  The yield curve did not invert and therefore, no recession would appear on the horizon and that's what ends bull markets. In 1987 there was a similar situation where the market had been soaring for months, greed was in the air and there ended up being a 25% crash. It's debatable as to whether you can call the 87 crash a bear market. To me, I look at it as a major pullback in the bull market that began in 1982 because the drop was swift and short lived.  Be prepared for the possibility of this type of drop because the markets have simply gone up in a straight line for a year. The trigger of the 87 crash was arguably rising bond yields in the face of a market that had been so strong for months and that made people start to get jittery. Then a bill got passed that made mergers & acquisitions less appealing (M&A was in a frenzy at the time) which created more selling pressure and then there was the popular use of portfolio insurance, which arguably was the straw the broke the camels back and was largely responsible for creating the biggest one day market collapse in history. This time around we have rising bond yields. We don't have portfolio insurance but what we do have is a mindless amount of ETF buying that took place during the past couple years. If sentiment turns negative let's see how how the appeal of low fees holds up during a  meltdown whereby ETF holders have no escape as they are held hostage to the indicies. ETF selling could exacerbate a correction into a full blown panic especially if there is leverage behind these purchases.

Be very careful at this junction. Markets could have ST bounce but I suspect that we are going to see a much larger correction at some point to clear out the excesses that have accumulated. I expect to see YTD gains wiped out at the very least. So, bottom line I don't believe we are entering a bear market but it may feel like one soon enough.