The bears and the pessimists continue to warn of impending problems for the stock market. Included are some of the reasons for their bearish stock market outlook: persistent inflation, higher interest rates, do not fight the Fed, impending recession, inverted yield curve, valuations are high (PE ratios), lack of market breadth, low VIX index, another bubble is developing, short-covering rally, small-caps and transports are not participating, etc.
Many of the above reasons can lead to a bear market. The one that has many bears concerned is the bubble phenomenon. A true bubble will almost always need to be pricked to begin the process of deflating.
So, is this a bubble? And, if not, what does this mean?
The SPX Index has rallied 27% since the mid-October 2022 bottom. The Nasdaq 100 Index has done better, rallying over 45.6% during the same timeframe. Both rallies exceeded the 20% threshold, suggesting a bull rally.
History shows bubbles are rare occurrences. It must be an ideal scenario to create the bubble and a perfect situation to lead to the bubble bursting.
Also, no one rings the bell at the top of the market or at the bottom.
When a bear market ends, the biggest gains occur during the first year or so of a new bull market or the resumption of an existing structural bull.
Time will tell if the low on 10/13/22 at 3,491.58 is a market bottom.
If the October 2022 low is another mid-term election year bottom or a 4-year cycle low, it signals the start of the next bull rally.
Of greater significance, if October 2022 is a market bottom, the January to October 2022 bear decline may be another cyclical bear within an ongoing March 2013 structural bull.
Understanding history remains a crucial aspect of successful investing. At the very least, it will offer investors a better and more informed perspective of the future direction of stocks.
Enclosed is SPX monthly chart with the following updated technical commentaries:
(1) The primary and dominant longer-term trend remains the structural bull uptrend channel from 2008/2009.
(2) To reverse the structural bull trend requires a violation of the bottom of the channel at 3,749 (red dash line).
(3) A death cross-sell signal in November 2022 as the 10-mo ma crossed below the 30-mo ma confirmed the Jan-Oct 2022 cyclical bear decline. Will a golden cross buy signal, with the 10-mo ma (4,119.42) crossing above the 30-mo ma (4,198.84), confirm the resumption of the structural bull trend?
(4) Top of the uptrend channel, currently rising at 5,725 (green dash line), is long-term resistance. Is this the next SPX target?
(5) Intermediate-term resistance resides along the 10-mo/30-mo ma (4,119/4,199 and the middle of the structural uptrend channel (4,130 or blue dash line).
(6) The July 2020 V-pattern breakout (3,231) also offers long-term support.
(7) Both technical indicators (MACD and RSI) are improving. If both trends continue, it can lead to an SPX intermediate-term rally and possibly a longer-term rally.