This is how a bear market begins

Market is addicted

Much like a "drug addict," any removal of the stimulus leads to an immediate and severe reaction. Given the high correlation between the Fed's balance sheet and the stock market, there is no reason to believe this will change soon.

Technicals Remain Weak

As noted in "Bulls Buy The Dip" the bullish trend remains exceptionally strong. Importantly, each "dip" gets bought at shallower levels despite deteriorating internal measures.

Liquidity Risk

For investors, the biggest risk remains the "liquidity" risk.

Every transaction in the market requires both a buyer and a seller, with the only differentiating factor being at what PRICE the transaction occurs. Since this is necessary for there to be equilibrium in the markets, there can be no "cash on the sidelines." 

In the current bull market advance, few people are willing to sell, so buyers must keep bidding up prices to attract a seller to make a transaction. As long as this remains the case, and exuberance exceeds logic, buyers will continue to pay higher prices to get into the positions they want to own.

Such is the very definition of the "greater fool" theory.

However, at some point, for whatever reason, this dynamic will change. Buyers will become more scarce as they refuse to pay a higher price. When sellers realize the change, there will be a rush to sell to a diminishing pool of buyers. Eventually, sellers begin to "panic sell" as buyers evaporate and prices plunge.

Sellers live higher. Buyers live lower.

What causes that change? No one knows.

But that is how bear markets begin.

Slowly at first. Then all of a sudden.

by Lance Roberts