Bear Market Rally or New Bull?
The stock market is filled with individuals who know the price of everything, but the value of nothing.
Markets are a funny animal. The last time the US reported an inflation rate of 8.5% was in Mar 2022 — stocks around the world dropped. In Aug 2022, when an inflation rate of 8.5% was reported — stocks surged instead. If you were trying to make sense of the market with forecasts and what you see on the news, you would be left holding your head in your hands. The lesson to be learnt is that you are not the only person participating in the market. If you are selling in fear to hold cash, somebody else is buying because they feel like it is a good time — and vice versa.
Global markets have risen over 10% since we last wrote about the following topics of interest:
The Great Singapore Sale is Here — how allocating capital during corrections would help you enhance and boost long term returns.
Worried About a Recession? — how worrying and trying to position for recession or other fears would not help your investments. In fact, a lot of economic data is lagging and basing decisions on it is not timely.
Bear Markets Have a Habit of Bearing Fruit — a history of how bear markets panned out over the years and why investing during such periods is good.
Given how the market has gone up despite the war still ongoing in Ukraine, inflation still at high numbers, tensions over Taiwan and more, a whole lot of investment strategists are now calling this current market condition a “bear market rally”. Most of these investment “experts” are saying that this bounce will be short-lived (Forbes) and to be aware of more pain (Bloomberg) ahead.
In simplified graphs and illustrations, most market crashes look like a straight line down but it’s typically not the case. And given that we have experienced two of the worst sell-offs in recent history (2000 — dotcom bubble and 2008 — Great Financial Crisis), it is natural to think that every sell-off or bear market would mirror these two disastrous events.
Dotcom Bubble Data — The Ups and Downs
Looking at bear market rallies or “dead cat bounces” during the 2000’s dotcom bubble shows that the market gyrated between double digit losses and gains every few months (chart below).
Global Financial Crisis (GFC) Data — The Ups and Downs
The picture for the 2008’s Global Financial Crisis is very similar. Market rallies were met by severe declines every few months (chart below).
2022 Data, The Now — The Ups and Downs
Now if we look at what has happened to the stock market in 2022 (chart below), the declines also tell a similar story. Following a decline, there is a rally, which is promptly followed by more declines. You can see why pessimism about the current market rally is so high.
Market Confidence
Apart from the pessimistic sentiment, other data points show that professional investors and managers were very underweight in equities and had extremely high levels of cash. In fact, these investors were also extremely bearish on holding bonds. Bonds have since bottomed out and are poised for some gains since the June lows.
Given what we have seen here, should we be negative as well and follow these expert investors since they appear to be in the know? Maybe not. The reality is that nobody, even those with a lot of information at their disposal, knows for sure.
Bear Rally or Bull? Which is it?
So is the current market is at the beginning of a new bull run or is it set for a lot more declines? We can actually turn to some internal market signals to shed some light as to whether the current rally is sustainable. These indicators can show the early stages of a bull market, called “breadth thrusts”; they simply measure positive price momentum vs negative price momentum of stocks. This data is significant as a large group of stocks rising at once can signify a change in the momentum and direction of the market.
The Dotcom Bubble & GFC — Analysing Breadth Thrusts
Using the same charts for the 2000 dotcom bubble and 2008 GFC, we plotted various early breadth thrust signals (B1, B2 and B3). Utilising one indicator might throw you off as the input can be noisy and could prematurely signal a recovery, but when several appear and cluster together — like it does in the red circles below — it provides a more reliable and accurate indicator to show that a change is happening, and that the market is turning around. This can be seen both in the dotcom bubble and the GFC in the charts below.
You may notice that it was — and still is — very hard to accurately call the bottom of the market (no matter what people may claim in hindsight). However these combined indicators were accurate in providing a general period where the bottom was, suggesting that the end of the sell-off was near. If we were to take the first cluster of signals for each market scenario, the total returns gained after 1/3/5 years are shown below.
2022 Data, The Now — Analysing Breadth Thrusts
So what are the signals showing for 2022? We have a good chance that the sell-off we have experienced so far could be ending as we have just seen the first cluster of these breadth thrust signals (chart below), and if the total returns gained after 1/3/5 years from this point are comparable to the Dotcom bubble or the GFC, they can be quite substantial.
Of course the market could still fluctuate with more lows and corresponding recoveries ahead. From past experience, we know that the road ahead is very likely to be bumpy. We do not have a crystal ball that can forecast what the market is going to do next. The current weak market and multitude of worries could continue to cast a gloomy backdrop and drag it out longer. But using real data without biases or opinions can provide a perspective into what is happening at the moment.
Like the quote in the beginning of the article; far too many people think they know whether the market is too high or too low, and have lost sight of the original goal of investing - which is to give up some certainty, assume some risk in order to receive a return above inflation in order to reach some important target that he or she has set out to achieve.
Worried about the current market situation? If you would like a second opinion or would like to find out about how to invest better in the long term in order to reach your goals, come and have a chat with us.
