In a September 8, 2015 blog, I indicated my strong belief that a major worldwide bear market had begun. At the recent February 11 lows, the S&P 500 was about 15% below its May and July 2015 highs. Most foreign markets had suffered more significant declines. The dangerous conditions outlined in that earlier blog remain major intermediate and long-term concerns.
One of the weakest beginnings ever to a new year turned short-term investor sentiment very negative. At extremes, sentiment measures can be excellent contrary indicators. In a bear market, sentiment can remain pessimistic far longer than during bull market corrections, but significant pessimism often marks at least a short-term market bottom.
Notwithstanding numerous ongoing negative conditions, we must now remain alert to see whether stock prices need to rise appreciably to relieve excess negative sentiment. A telling point is likely to be whether stock prices can remain above their February 11 lows (about 1810 on the S&P 500 and 15,500 on the Dow Jones). Remaining above those levels could rekindle more bullish feelings for a while, even leading to a test of former highs.
On the other hand, a break below the February 11 lows could unleash torrents of selling, as investors come to believe that central bank rescue efforts have become ineffective. Either way, the year ahead is likely to be extremely volatile, with the potential for a market, economic, political or military event decimating longer-term investor confidence and leading to a persistent, destructive market decline.