Is it a bear market? Oh, I guess that depends on your definition. If you think the media, which somewhere along the line defined a bear market as down 20%, then I suppose we’re not in a bear market.
I am not one, when the S&P 500 goes down only 19% while the majority of stocks are in downtrends for more than a year, who thinks we can call that a correction. I have said many times here that I think the bear market started in the first quarter of 2021 since that is when the majority of stocks peaked and began their downtrends. We had a Nifty Fifty type market in 2021 as a handful of index moving stocks sucked the life out of everything else that traded.
If my definition is correct – and there is no rule that says it is – but if it is, then we are almost 18 months into this bear market. So, is this a bear market rally or the start of something bigger? I do not know. I didn’t know that I was going to think we were in a bear market after that February 2021 peak until well after the fact when I saw how many stocks could not recover and every attempt at recovery produced a lower high and a lower low.
In most bear markets we have seen extreme sentiment and extreme oversold conditions create a rally. Rarely does anything go down in a straight line. In the spring of 2008 we had a 10% rally that lasted nearly two months and even at that didn’t bother to head south in a major way for a few months after that. In 2000-2003 the S&P 500 made it almost back to the old high six months after the initial peak in 2000. A year later, post 911 we made a terrific low and rallied for six weeks and then churned back and forth for another six months before heading south again.
This is a long way of saying I do not know how this rally will develop, but we can note a few things today. Using my Oscillator, we got short-term overbought last Thursday, and the market did not turn down immediately. That is the first time in 2022 we held up even after being short-term overbought. That is a slight change.
Now let’s move the McClellan Summation Index where it now requires a net differential of negative 6,200 advancers minus decliners on the NYSE to halt the rise. That’s a lot. Consider that there are approximately 3,400 issues that trade on the NYSE daily. So, this means we’d need two horrific market days just to halt the rise and another to turn the indicator lower. That’s what makes it overbought (but not negative.)
If you look back you can see how extreme this is and how bullish it was in 2020 and in 2018. Even in 2016 it was quite bullish. But what about back in 2008-2009? Now it gets interesting. March 2009 was bullish. The other two readings were in early November 2008 and early January 2009. You can see on the chart of the S&P 500 from then they were quite bearish.
I suppose we will know within the next 1-2 weeks if this is more like those two readings from late 2008/early 2009 or more like the others. My base case is that it is not like those and more likely a hybrid where we have a short-term dip/pullback and another rally attempt.
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