Equity markets have broken down, it's that simple. As always at the end of great bull markets, investors are reluctant to let go of the good times, but the sellers appear to have taken control. Although the S&P 500has yet to enter bear market territory, it appears headed in that direction. Let's look at the phases that brought stocks to their current levels, and at what to expect next.
The first major sign of weakness was the steep and rapid fall of shares of energy companies, which began to decline in 2014 as an oversupply of oil coincided with slowing global growth. The mismatched market led investors to push crude oil prices from as high as $110, to current levels near $30. We can use an exchange-traded fund, the Energy Select Sector SPDR (XLE) - Get Report , to track the sector.
A massive decline in energy-related stocks weighed on broader indices, but the continuance of low U.S. interest rates kept other sectors at elevated valuations. Similarly, bond prices were supported by an accommodative Federal Reserve monetary policy. When the Fed began realistically discussing a rate hike, SPDR Barclays High Yield Bond (JNK) - Get Report (an ETF that tracks high-yield, or so-called "junk" bonds) quickly fell to new lows. High-yielding loans to the energy sector were already in trouble due to the oil price collapse, but increasing rates introduced further risks. The junk bond index has shed nearly 20% since the middle of 2015, and with the Fed set on further hikes in 2016, there looks to be no bottom in sight.
Even with collapsing high-yield debt and falling energy prices, equity markets traded sideways in 2015, with a mini crash in August. The August declines were sparked by Chinese economic weakness indicating that the global economy was in a difficult situation. Morgan Stanley (MS) - Get Report , as well as other large global banks saw their price action derailed in August, and have had difficulty finding significant buying support since. Morgan Stanley's share price is off about 40% since its July highs, and is entrenched in its current downtrend.
The last, and most notable sectors to decline have been technology and biotech stocks. A proxy for both sectors are Netflix (NFLX) - Get Report and Gilead Sciences (GILD) - Get Report , both pictured below. The two stocks had been market darlings since 2012, with Gilead experiencing a rise of as much as 525%, while Netflix increased as much as 850% during that time. Over the past six months, however, both stocks formed topping patterns, ultimately resulting in breakouts lower.
The recent equity market declines have left few sectors untouched, and the sectors that are being brought lower are significant indications of health. The downturn appears to have just begun as far as the broader indices are concerned, but over the last few years, a wave of individual sector corrections have taken place. It seems as if investors will need to wait for a while longer until all of the sellers will be satisfied and stocks have reached levels appropriate for the post-quantitative-easing era.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.