Stock Market Selloff

This past week saw a massive selloff in the U.S. stock market, with the Dow Jones Industrial Average suffering its biggest weekly loss since 2008. Both it and the S&P 500 index were down about 6.5% for the week.

This market downdraft was one, by the way, that I gave a warning about to my Twiiter (@tdalmoe) followers last week.

The inevitable question I've been asked numerous times is “Why?”. The answer is simple.....

At the end of its meeting on Wednesday, the Federal Reserve made a major announcement.

The Fed said it would be purchasing Treasury bonds with the proceeds from other bonds and T-bills as they expired. There would be, for now at least, NO new money used to make their bond purchases.

My gawd! No more new money for the casino players on Wall Street. No more new money for the Wall Street “addicts” who had gotten used to free money from the Fed in the form of QE1 and QE2 to the tune of about 1.5 trillion dollars over the past two years.

The traders heard this and went into full panic mode, selling everything. Poor babies...crying from just getting a taste of what the American middle class has been getting over the last two years – no help.

What will happen next? No one knows, but here's my guess.....

The U.S. market has further down to go. Many other global stock markets already back down to 2009 levels, giving back much of the gains of the past two years.

The stock market has to play catch-up because the U.S. economy is in just as bad, if not worse, shape as other economies around the globe.

That realization is just dawning on stock market players who have fantasy booming earnings expectations built into the price of many stocks.

This is especially true for technology stocks.....

People all over the globe are struggling to make ends meet and in parts of the emerging world are struggling to pay for the high cost of food.

The “thinking” by investors in technology stocks right now is that it doesn't matter. People may not eat, but they will surely will buy the latest hot smartphone or tablet computer.

That “thinking” is sheer nonsense. Until this investor psychology is broken and the bubble in Nasdaq stocks is broken and the index is much lower, the U.S. stock market has only direction to go – down.

That is, until the Fed unleashes trillions of dollars in QE3 to Wall Street, ending the "shakes" from the money addicts there.