A Bullish Market Despite Persistent Fear Of A Bear

A Bullish Market Despite Persistent Fear Of A Bear

April 19, 2023

Despite the mild pullback on Thursday of last week, last week once again managed to put in a positive return. Four of the past five weeks have been up weeks even though the institutional investors have been more negative and have a higher short position than has been seen in some time. The number of reasons why this market should continue to be stronger, based on statistics, keeps on stacking up.

Below is a very specific picture from Bank of America showing the allocation to equities (stocks) vs. bonds. This shows that the minimum equity exposure was right at the lows of the markets. You can see where it is today!

The most recent one was that stocks have been up 65% over the past 20 trading days (13 of 20). This is the highest percentage number since November of 2021 and a reason it is starting to "feel like a bull market."

Now, fundamentals are for the longer-term investor, and technicals (chart patterns) tend to be for the shorter-term investor that is most affected by fear, hope, and greed. You can see below that down days prevailed starting with October / November 2021, and the number of up days couldn’t get up off the mat, yet this has changed of late:

Earnings tend to be part of the fundamental picture, and as of last Friday's close we had already seen:

  • 6% of S&P 500 companies had declared earnings.
  • Overall, the earnings of these companies beat earnings estimates on average by 9%.
  • 87% of these companies beat their expected estimates.

Does this sound like an economy that is doomed for a recessionary disaster? I don't think so. This brings me to a very important point that has just finally happened. The 50-day moving average of the S&P 500 has moved up and has crossed above the 200-day moving average. This is a hugely positive point. According to Jeffrey Saut of Saut Research, "If the bullish scenario plays out, and if we get a 'measured move,' the trading target on a short/ intermediate basis would be 4,395." See the very graphic picture of this in the case of the NASDAQ 100 just last week. Notice the blue line (50-day moving average) crossing above the red line (200-day moving average):

Taking this back further, and not just looking at today, it can be seen that since 1950, when the S&P 500 has remained above its 200-week moving average for at least 25 weeks, it has achieved a positive outcome 12 out of 12 times. It is tremendously interesting that on the market low of last October 12, 2022 (the market low in this cycle), it kissed this 200-week moving average and bounced! Not just that, but positive for one month, three months, six months, and one year!

See below for an expanded picture of the period from January 2018 until today, with a red dot at the October 12th date:

The Dilemma:

The current dilemma that has market participants nervous is now a function of the:

  • The level of interest rates.
  • The fears of an impending recession.
  • The effect on economic growth as a result of tightened standards on lending in the banking system.

The Fed governors across the country are now beginning to disagree on whether the Fed needs to raise rates further. Janet Yellen, the US Treasury Secretary, stated at the end of last week that the increased scrutiny of banks has caused them to dramatically tighten their standards on lending, decreasing the amount of lending, in general, and, consequently, slowing the economy. This is seen as having the same effect as a rate cut in the magnitude of 1/4-1/2 of a percent. 

Herein lies the dilemma, are we getting closer to a recession than we previously expected due to economic slowdowns, continued interest rate hikes, and stricter lending standards? The reality is that this doesn't matter!

The markets are a discounting mechanism, meaning what we see today is an indicator of future economic reports. To demonstrate, let’s look back at recent history:

  • In March of 2022, the Fed began to espouse that they would decrease the money supply and start raising interest rates.
  • The market topped in November 2021.
  • Fed began raising rates in March of 2022 (four months) later than the market topped. 
  • The market puts in a bottom on October 12, 2022, on the same day that it touches the 200-week moving average (look at the chart above again). 
  • Fed begins to infer as does Janey Yellen that they may be close to done raising rates. 

We really won't know till all the facts are known, but I have mentioned time and again about the "rule of 1st 5 days" since 1950 has been very prescient! See below:

The last point that I want to touch on is Ari Wald's "Bear Market Checklist." In virtually every bear market /major market correction, there have been 10 measures that have been evident in determining if a market has exhausted its downside move. As seen below, the only one that hasn't been checked off is the net new high being -1000. This time it got down to -648 and turned up, again, right on October 12, 2022.

Nobody can be 100% certain of what the market is going to do or what the next "black swan" could be that erases a current trend. What we can do is focus on historical probabilities. At present statistics favor the market telegraphing rate hikes being close to over and a recession ending up being more of a soft landing. As a result, the decline that we experienced in the markets appears to have been a reflection of Fed actions and earnings slowdowns, yet the volume of money that was dumped on the economy has acted as a life preserver to discretionary spending, employment strength, and ultimately equity prices. The issue is that this has become the most widely anticipated recession ever, which raises the question of whether a "rolling recession" has already passed and along with it the still feared market bottom.  



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