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Bear market looms as small-caps collapse

The selling was persistent, unyielding and powerful on Wednesday as U.S. equities melted lower. The decline had no specific catalyst, only a growing sense of fear that policymakers both here and overseas have lost control of the situation as energy prices keep weakening, currency volatility increases and economic data continues to soften.

Much anxiety stems from concerns that the Federal Reserve made a policy mistake when it stopped its QE3 bond-buying program in late 2014 and raised interest rates by 0.25 percent in December (for the first time since 2006). Either the Fed waited too long -- or didn't wait long enough. It's not clear yet which.

But the result is clear: Small-cap stocks as tracked by the Russell 2000 index are now down 22 percent from their June high, officially entering a bear market (chart below). Large-caps aren't far behind: The NYSE Composite is down 16.7 percent from its May 2015 high.


Everywhere you look, faith is being lost.

The U.S. Oil Fund (USO) lost 0.9 percent after gasoline inventories swelled by 8.4 million barrels this week, capping the largest two-week build on record. West Texas Intermediate crude has been flirting with levels last seen in 2003 around $30 a barrel.

High-yield, or "junk," bonds were also under pressure with the Barclays High Yield Bond ETF (JNK) breaking down to fresh lows testing the $33-a-share level for the first time since June 2013. Concerns over the threat of energy-sector defaults keep rising as crude oil keeps falling.

One-time new tech favorites are being abandoned. Wearable camera maker GoPro (GPRO) was slammed as much as 25 percent in after-hours trading on Wednesday after lowering its fourth-quarter guidance and announcing a 7 percent workforce cut. Vision system supplier Ambarella (AMBA) lost 11 percent in sympathy. Even once-almighty Apple (AAPL) lost 2.6 percent to drop back below $100.

Lowest oil prices in 13 years

On a technical basis, sentiment is reaching a critical juncture: Either investors launch a full-scale panic-selling wipeout, or brave bargain hunters squeeze the short sellers and ignite a "dead-cat" rebound.

Bullish sentiment in the latest Investors Intelligence survey fell to 28.7 percent from 34.7 percent last week, its lowest level since late summer when the percentage of bulls fell to 24.7 percent. Similar readings were seen in March 2009 (26.4 percent) and November 2008 (22.8 percent).

It's worth noting the survey pointed out that pessimism isn't yet excessive nor is the negative bull/bear spread (-7.1 percent) sending a strong buy signal.

More damage is likely as catalysts such as the ongoing collapse in crude oil, the rollout of poor fourth-quarter earnings, Mideast tensions, fresh weakness in junk bonds, the specter of more Fed rate hikes and turmoil in China's markets and the fragility of that country's overindebted economy keep the pressure on.

Investors looking for an exit should sell during any rallies as 2016 is shaping up to be something nasty.

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