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The stock market has taken on a new face. Broad fundamental uncertainties and worries (beyond employment and housing) are getting more notice and growing in significance. Stocks and indexes are breaking through their bull market patterns and barriers, ramping up technical concerns. Therefore, we cannot assume this is the hoped-for bull market correction. While that would be desirable, this shaky new territory could turn ugly, producing a true bear market.

Disclosure: As discussed in previous write-ups, author has sold and is holding cash reserves.

Earlier in the year, there were numerous articles warning that the steady uptrend was looking toppy. At that time, expectations were that a “normal” correction would reset the clock and provide a new bull market foundation. However, conditions have changed, and the previously bright indicators of future growth have lost their glow. There are no signs of a reversal or recession, but the bull market is losing its support. Weaker growth, as we are seeing now, can play havoc with company earnings growth expectations. Moreover, the added risk (uncertainty) means valuation levels likely will not return to their recent highs.

Today’s technical picture is at a critical juncture:

So, what is a good strategy for this uncertain period?

Cash reserves continue to be of key importance (see “It’s Time To Clean The Portfolio, Clear The Mind And Prepare For Coming Opportunities “). Besides offering protection against loss, they provide the resources to take advantage of coming opportunities. In addition, they allow keeping a positive mental attitude towards investing.

Is it time to follow Buffett’s lead and buy?

There seems little reason to jump back in the market. Chances are the recent declines have not adjusted prices or expectations fully, so this could be the opening act of a drawn out affair.

The bottom line

The stock market’s fundamental and technical characteristics started turning negative in July, and now we are seeing the confirmation that things are amiss. The widespread nature of weakening growth means this period is likely to be more serious than a bump and recover. Instead of a quick rebound, the uncertainties, worries and unknowns need to work their way through the valuations and into analysts’ and investors’ thinking. And that more serious adjustment raises the specter of emotionally driven selling recurring. Only then can the market rebuild a new bull market foundation.

Worst-case worries (mega-fears) may reappear

Fright has been out the stock market since late 2012. Yes, there have been minor bouts of apprehension, but big bear anxieties (a la 2010 and 2011) have been in hibernation. However, in investing, emotions are always near the surface, and a larger shakeup can reawaken fears. Will it happen this time? That is uncertain currently, but the conditions are right, making it a real possibility.