Who is Right - the Bulls, the Bears, or Neither?
The bulls tend to excel during periods of economic strength. The bears tend to dominate in periods of an economic slowdown. Historically, bear markets are shorter than bull markets.
Studies have shown the average length of a bear market is just under 1-year, around ten (10) months or 289-days. A bear market is typically the result of a contracting economy and rising unemployment rates. A bear market is more likely when an impending recession is imminent on the near horizon. A recession has followed a bear around three-quarters of the time.
Although bear markets have become less frequent since World War II, they still occur an average of every five (5) years. During a lifetime, investors experience approximately a dozen or so bear markets. Again, since WW II, the recovery from a bear market has averaged around two years. There are outliers, including the recent Feb-Mar pandemic-induced brief recession and a bear market.
A bull market occurs when the stock market rises 20% or more from the bottom. A bull market typically occurs under a robust or recovering economy where unemployment rates are low or trending down. Economic recovery or economic strength leads to a sustainable bull market.
Bull markets tend to be longer than bear markets and are more frequent than bears, occurring more than seventy-five percent of the time in the past century. The average bull sustains on an average of under three (3) years. Again, there are outliers, including the recent seven (7) year bull market from 2013-2022.
While bear markets can be unnerving, they are part of the typical course of an economic cycle, incurring periods of economic contractions and expansions. Stocks are leading indicators, discounting business cycles approximately three to six months ahead of a top and bottom.
So, who will be proven right as the Nov 2021/Jan 2022 bear market enters its 1st anniversary – the bulls, the bears, or neither?
Technically speaking, there are three possible SPX scenarios:
(1) Bullish scenario - SPX retests the Jan 2022 all-time high (4,818.62) and above this to 5,158.98 (breakout target above 4,325.28). The caveat is SPX maintains pivotal support at 3,491.58 (10/13/22 reaction low) and a convincing breakout above 4,325.28 (Aug 2022 reaction high). The scenario gains traction if the FED engineers a soft landing.
(2) Neutral scenario - The bulls and bears are deadlocked, with neither party in control. SPX enters a wide trading range between 3,500 +/- 100 and 4,200 +/- 100. The scenario gains traction if the FED's actions lead to a shallow or brief recession.
(3) Bearish scenario - The primary 1-year downtrend remains as SPX violates 3,764.59 (Dec 2022 potential higher-low pattern) and subsequently breakdown below 3,491.58. A lower-low triggers a capitulation selloff as SPX declines toward 3,000-3,200 (61.8% retracement from Mar 2020-Jan 2022 rally), 38.2% retracement from Mar 2009-Jan 2022 rally, the bottom of the 1-year downtrend channel, Sept/Oct 2018 and spring-to-summer 2020 highs and Mar 2020 highs, and Sept 2020 lows.
Under a worst-case scenario of a deep or prolonged recession, SPX can fall to 2,650-2,850 (78.6% retracement from 2020-2022 rally, 50% retracement from 2009-2022 rally, breakdown projection below 3,491.58, and Jun, Aug, Oct 2019 lows).