As discussed last week, the period from 1929 to 1932 exhibited a devastating bear market for stock investors. Along the way, multiple sharp rallies became opportunities to get out of stocks altogether while preserving capital and a chance for a trader to be selling short for a profit.
With an initial thrust two weeks ago, last week appeared to be a pause in a bear market rally. Now, we look for a continuation of the rally. Thrust, pause, thrust is the pattern. Eyeballing the S&P 500 or SPY ETF weekly chart, we note that the reversal from two weeks back was on a long bar, closing at the top of the range, a bullish formation. The one detractor of the move is that it was on less volume than the prior two weeks. Though the lack of volume is not a deal killer per se, it does show a lack of conviction.
So, we believe we are in a bear market rally, not the start of a bull market.
What’s in favor of the bull case, at least short-term, is that stock market sentiment has been extremely negative for over a month. Valuations have improved—also, the recent price action in high-profile stocks such as Microsoft has been constructive. On disappointing guidance or earnings news, a stock initially gets hit hard but turns positive by the session’s end. That is bullish action, up on bad news. Good stuff.
But what is in favor of the bear case is the persistency of crude oil and gasoline prices moving ever higher this year. Everything in the world’s economy is tied to these energy markets in some manner. The higher costs of energy ripple through the economy, there is no avoiding it. The hydrocarbon economy delivers all goods and most services.
So, the resulting inflation trends, the loss of consumer buying power, the lower savings rate, and the uptick in consumer credit reflect the stress on the economy. Generally, expanding consumer credit is viewed bullishly as the consumer sees a brighter future and is more willing to use credit. But now, it appears consumers are increasing credit card debt to deal with tighter budgets. Not good, especially as interest rates rise.
The recent direction of margin debt is also in the bears’ favor. Expanding margin debt is bullish, and the converse, contracting margin debt is bearish. We need to continue to monitor the decline in margin debt. If margin debt stops declining and reverses to the upside that would be a plus for the bulls.
After the first downdraft of the 1929-32 bear market, stocks rallied sharply off the November 1929 lows to find resistance at what was former support for the market before the big decline. Looking at the S&P 500 or SPY ETF, we see a similar pattern. And as of this writing on Tuesday morning, we are above the February 24 lows, former support. Re-establishing price above that February 24 low that sticks would add to the bull case. Failing to stay above the level after testing would add to the bear case. False / failed moves such as that have a tendency to unwind in a fast move in the opposite direction.
Our master cycle, which we described well enough in our last market note, has a low for the year on June 25, a Saturday this year. These things are never exact but give a helpful guide or roadmap for what the market might do. We will note that the indispensable Stock Trader’s Almanac for 2022 shows that on June 24, the S&P 500 has only risen 28.6% of the time over the last 20 years; since 1954 only 34.3% of the time. So that fits with our master cycle to some degree.
Trade well and stay safe. JHS
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