Forbes-Bear Market Rallies

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The US stock market continues its treacherous year, with the S&P 500 down more than 20% year to date and the Nasdaq Composite Index down 28% as of June 22. The sharp price drop in equities was driven by the Federal Reserve raising rates and shrinking its balance sheet in an effort to slow inflation. Additionally, the economy slowed, particularly in the housing sector. The negativity was heightened by the war in Ukraine and uncertainty about the upcoming midterm elections. Unfortunately, we believe that the final low of this bear cycle has not been reached.

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However, even if long-term lows are not reached, equity markets rarely move in a straight line. On a short-term basis, US equity markets are approaching highly oversold levels. History shows that it would be logical to expect a bear market rally soon. While there is risk involved, we think there is an opportunity for agile investors to trade a countertrend rally.

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Below are S&P 500 bear market statistics for the last 50+ years. As one can see, the current bear market is still below the average and average losses of similar bear markets. Perhaps more importantly, from a 164-day time perspective, the current bear market is very short. If this bear market had been of average duration, it would have been roughly only a third over.

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If we examine these past bear markets, except for the markets of 1987 and 2020, in which there was no additional undercut of a V-shaped recovery (2020), or earlier lows (1987), we find five Extended S&P 500 bear markets meet. These five averaged out an average of six failed follow-through days (FTDs). We define FTD as a market move upward of 1.7% or more (historically used 1.2% or more), followed by a new low on a day-to-day volume increase of four day or more. The table below shows the average statistics for those failed FTDs. As one can see, normally failed FTD has gained 11.8% in 26 days from FTD. So, a month of largely positive performance.

However, there have been 16 bear market rallies after FTDs lasting 40 days on average. All returned over 10% and the best, 5 out of 16, returned over 20%. Looking at the damage done in 2022, we think there could be an above average rally in this year.

An example of a solid bear rally rally from the long bear market of 1973-1974 was a 13% increase in 51 days. It started when the market was down about 20% from the high and after three previously failed FTDs.

One of the strongest bear rallies ever in the midst of the 2000-2002 bear market. After falling 38% from the S&P high and experiencing five failed FTDs, it gained 25% in 108 days and tested a decline in the 40-WMA. It then went sideways for several months and eventually brought down another big leg.

In the current bear market, the S&P 500 has experienced four failed FTDs so far, on its way to reach 25% from its highs (see * below). Bear market rallies have been on average weaker than bear rallies in history (see above). This gives us confidence that we could be due for a bullish rally if the FTD occurs.

Currently, we await another possible FTD. This could happen by Friday, June 24, 2022. If it does, we would like to see some immediate price appreciation after this to give us firm confidence in a tradable rally. Also, in such a scenario, we would recommend gradually adding capital to the market with the understanding that one should exit the trade on the indication of a cluster distribution.

If an FTD does occur, here are some of the areas that we believe will be the best positions to continue to lead. The blanks can be used as starting points for creating a shopping list for a bear rally. It is always possible that the next move in the market will be more of a bear rally. Although we doubt this will be the case, we always want to follow our technical signals and respect the market action.

We will also be open-minded about looking elsewhere in the world, as many global regions currently appear more intriguing than the US market. These include Hong Kong/China (which appears to be already on a downtrend after an already long bear market), UK/Canada/Norway (energy, utility, and financial heavy), and Southeast Asia (long term backward market, commodity/ financials). high risk).

In the meantime, we will use potential upside in oversold areas such as down areas to sell in strength, either owned or if buying for a short-term move. The resistance/overhead supply in these areas is too great to be resolved in any immediate sense.

Lastly, we remain vigilant. We have no indication that the market has finally bottomed out. Importantly, the US market remains short of breakouts, generally indicative of real market strength, averaging only 28 over the past eight weeks, with longer-term averages of over 110 per week. Furthermore, very few stocks are currently positioned in traditional technical set ups, so the breakout figure is unlikely to increase in the near term. However, we want to be cautious of the opportunity to make money and what a bullish bear market rally could offer.

Co-author’s statement:

Kenley Scott, Research Analyst, Director, Global Equity Research, William O’Neill + Company contributed significantly to the data compilation, analysis and writing of this article.


No part of the authors’ compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed herein. O’Neill Global Advisors, its affiliates, and/or their respective positions, and may at any time act as principal or agent of the securities specified herein, buy or sell.

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