"Chain of Demand" Equation For Stocks Has Broken, Market Undergoing Significant Change...

In a normal market we should've had a major countertrend rally by now. All the ingredients are there: there is a significant amount of shorts in stocks across almost every sector, bearish sentiment lies at extremes, and there is definitely capital on the sidelines. There were many days over the last couple of weeks where in a normal market we would've and should've reversed hard. However, the market has changed.  What makes this market abnormal now, is the significant decline in the number of real buyers and the significant decline in buying power behind these buyers. Tons of hedge funds have fallen by the wayside and closed up shop, and those who've managed to survive are left managing much less capital. Mutual funds are being depleted by the average American pulling out cash for 2 major reasons: declining or no income and mistrust of Wall Street. Investment banks no longer exist, all are now commercial banks so they can no longer take on the same amount of risk and therefore must pare back exposure to equity markets.

The confluence of these factors is allowing shorts to essentially lean on the markets and stocks overall because they've undoubtedly recognized that longs are literally "short stacked." We've seen attempted rallies fail over and over and thats because there is no longer enough capital behind bidders to sustain large and long rallies. You need a "chain of buyers" to have long sustained "frothy" rallies....smart money + hedge funds come in first, followed by momentum traders and short covering, followed by the average joe. This equation (which I call the "The Chain of Demand") has literally disintegrated over the past several months in that the first jolt of buying pressure caused by smart money/hedge fund entry has weakened due to lower capital reserves, and the second phase of the equation, specifically the short covering aspect has been weakened due to the recognition that the first phase of the equation is weak. Meaning shorts have recognized that the institutional buying power is "short stacked" so there is now much less fear to cover because they know the smart money doesn't have enough buying power to drive and sustain long rallies. Lastly, the lack of "dumb money" or average joe money is nonexistent now as they've pulled out of the market all together. This means that the market can no longer create any frothy valuations anymore, that was the responsibility of dumb money. And again, the shorts recognize and are aware of the inability of the market to create "froth" so the fear to cover is again diminished.

Moreover, the anti-capitalist economic policy being driven by the Obama administration is adding even further disincentive for sidelined money to enter the market. What gives anyone incentive to enter the market and take on unneeded risk when the Obama administration is in the process of killing capitalism, and putting further pressure on an already weak economy through unneeded tax hikes? Believe what you will, but I'm telling you the last 2000 points of this downleg has been 100% as a result of Obama's economic policy, and the lack of buyers will continue to present itself until Obama recognizes the error of his ways. He needs to implement a policy of incentives in order to bring market participants back to the market again and take on risk. Until this happens there is no real reason to enter the market other than "stocks are cheap," and this statement lacks conviction because of the uncertainty over the cumulative long term effects of Obama's economic policy (primarily how his policy will effect overall consumer demand and corporate earnings) which ultimately leads to uncertainty over how long this downturn will truly last.

In my opinion it will take many, many years for this equation to resurrect itself again if at all. People across the entire economic spectrum are fed up with the market all together, and are in the process of saving capital rather than allocating it to high-risk investments and outright consumption of goods and services. We need to get used to and accept the fact that the market has changed and adjust ourselves to the reality of shorter rallies or a long drawn out rangebound market.