While the current bear market seemed to have no end, multiple occurrences have identified some near-term relief for investors. After the longest economic expansion and bull market in history, investors have endured a grueling bear market that began in January 2022. Perhaps investors were spoiled by the shortest bear market recorded during the 2020 pandemic.
Investors/traders know that change is the only constant in the markets. And that no market only rises without experiencing price corrections. Informed participants will be aware of these statements and have strategies to deal with the inevitable dips in market prices.
Currently, five situations are supporting this current price rally in stocks:
- Percentage of S&P 500 stocks over their 200-day moving average
- Bearish news did not crater market prices as would be expected in a bear market
- A strong seasonal pattern reflects April's tendency to see new money returning to stocks.
- Historically, bear markets have an average duration.
- The S&P 500 golden cross occurred.
Percentage of S&P 500 Stocks Above Their 200-Day Moving Average
While the S&P 500 index appears to rally, we must see the market's internal strength. One way to get that is by identifying the number of S&P 500 index stocks currently trading over their 200-day moving average.
When Bad News in a Bear Market Does Not Crater Prices
Recently the market was hammered with news that there would be a global banking crisis. Banks were under scrutiny over depositors' funds used in long-dated interest-bearing instruments. There were concerns that depositors would lose all their money. The media kept showing pictures of patrons standing outside banks.
It's no wonder there was so much panic among investors hearing and seeing this information daily. Thank you, social and mainstream media, for putting the fear of god in folks so you may get advertising revenue.
If the stock market were still entrenched in a bear market, prices would likely have fallen precipitously to new lows. But, instead, they meandered around and slowly began to rise.
Events like this are not typical in a bear market. Leading the bulls to believe the bottom may be in this bear market.
A Significant Bullish Seasonal Pattern Occurs in April
Source: Moore Reseach Center, Inc. (MRCI)
Many investors need to be made aware that financial assets have seasonal tendencies. The stock market has several fundamental events that happen annually, resulting in the market reacting in a consistent pattern around that time.
MRCI research reveals that a significant upthrust has repeatedly happened for the past 15 years during April. What could be the catalyst for this pattern?
Perhaps, the tax season, where investors who filed early are now injecting cash into the market with their tax refunds. Or, after taxes are filed, taxpayers are informed they have until April 18th this year to contribute to their 2022 retirement accounts.
Historically, Bear Markets Have an Average Duration
Due to the popularity of investing in stocks for long-term returns, the duration of bull markets far outpaces a bear market. Also, stock indexes are designed to be rebalanced yearly by removing the underperforming stocks and replacing them with stronger ones, leaving an upward path as the most logical direction over the long term.
Bull markets tend to last, on average, about 3 years, while bear markets tend to revert in about 10 months.
The recent bull market peaked in January 2022, as the chart below illustrates, when prices began to fall by more than 20% leading to a new bear market. During this decline, leveraged funds(green line) built a significant short position that had not been seen since the pandemic lows. Another term for this is a crowded trade—too much speculation in one direction results in prices struggling to continue.
The January 2022 peak in prices allowed for a projection of 10 months (an average length of a bear market) into the future, and October became a possible month of bear market reversion.
The S&P 500 Golden Cross Occurred
During the first week of February 2022, the S&P 500 index's 50-day moving average exceeded the 200-day moving average, commonly called the "Golden Cross." When this occurs, investors get a green light to be bullish again buying stocks.
Due to the number of investors following this pattern, it almost becomes a self-fulfilling prophecy of a new bullish market environment. The Golden Cross is a lousy timing tool due to the lagging nature of the two moving averages used, and the time it takes for them to cross allows the price to have rallied into overbought territory.
Barchart's Senior Market Strategist, John Rowland, CMT, led a webinar titled "Understanding the Golden Cross-A Simple But Powerful Strategy." In his archived webinar, John references some popular uses of the Golden Cross pattern. Viewing this webinar will reveal supportive evidence of this current price rally and how John advised timing the investment.
Summary
Is this the end of the bear market in equities? Will we go to all-time highs from here? Could this price rally fade, and we begin another long duration of sideways trading?
Currently, the answers to these questions would be pure speculation, and nobody knows precisely the outcome of these questions until they happen. But we know that prices have been slowly rallying. The five items I've mentioned in this article support this rally, ultimately resulting in more confidence for investors/traders to dip their toes back into the market on the long side.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
