Cyclical Bear and Structural Bull?
Stocks continued with their sell-off on Thursday amid fears that a stronger-than-expected GDP will force the Fed to remain restrictive and hike up rates far more than expected during 2023.
The Commerce Department’s final reading for third-quarter GDP showed the US economy grew at a pace of 3.2% or above the 2.9% estimate from a month ago. The report contributes the stronger-than-expected reading to increases in exports and consumer spending, partly offset by a fall in spending on new housing.
The volatility over the past few days may be attributed to the lack of liquidity heading into year-end. Fast-moving and unexpected news, including the third-quarter GDP revision, can exaggerate market swings.
Remember, economic numbers such as the GDP data are backward-looking, recording the state of the US economy three months ago.
The stock market, on the other hand, is forward-looking. It is a leading economic indicator and a better representation of where the economy will be in the near-distant future.
There is an inherent upward bias in US stocks, at least from a long-term perspective (i.e., many decades and centuries). It is not wise to bet against the long-term uptrend in stocks. However, there are times when investors must be cautious about the future stock market outlook. The market will often provide amble signals to warn investors of a change in the long-term trend and shift in sentiment toward a bearish outlook.
The attached 100-year chart of the S&P 500 Index supports the basis that US stocks remain in a secular or structural bull trend that began in earnest in May 2013 via a multi-year breakout above the prior 2007 all-time high of 1,576.09.
In the past century, common traits of SPX secular bear markets are the following:
(1) Monthly RSI broke below 30.
(2) Monthly PPO broke below zero level.
(3) Lack of all-time highs and a lower-low pattern.
(4) SPX convincingly violates the 30-month and 40-month moving averages.
(5) The trends of the 30-month and 40-month moving averages change from uptrend to flat-to-downtrend via a rolling of the monthly averages.
SPX nears another secular or structural inflection point. The outcome helps decide the structural trend of SPX. PPO indicator (1.472/4.093) stays above the zero (0) level. RSI indicator (47.71) finds support above 35. SPX retains the 30-mo ma (4,034.73) and the 40-mo ma (3,781.23) on a monthly closing basis. Satisfying the above criteria confirms the Jan 2022 bear decline as a cyclical bear operating within the confines of the prevailing May 2013 to present secular/structural bull.
Although inflation, interest rates, the Fed, geopolitical, and macroeconomic concerns can abruptly change in the New Year, triggering a dramatic shift in the above technical conditions, it is best to respect the longer-term secular or structural uptrend in US stocks.