A bear market is defined as:
A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.
Now I know what some of you are thinking. That I am late to the program. The US and many other global market indices have risen where they are no longer down 20% from their highs. The bear market was over a month ago. But being a technical trader, there was one trigger that I have been waiting for. Regular Equity Guru readers were watching for this too.
I am happy to say that this trigger was confirmed with the weekly candle closes on August 12th 2022.
The S&P 500 is my choice for watching the broader markets. 4200 was the big resistance level. It was the neckline of the head and shoulders pattern which triggered back in April 2022 and initiated the following bear market.
Typical head and shoulders theory states that as long as price remains below the neckline, more lower highs and lower lows are possible. Or simply put: the downtrend is still intact. Once price reclaims the neckline (support), the head and shoulders pattern is effectively nullified.
The long awaited weekly close above 4200 finally happened and confirmed the ending of the downtrend. Now, 4200 becomes new support as the S&P 500 aims for previous highs and then, new all time record highs.
A major breakout also on the Nasdaq. We closed above 13,000 on the weekly chart. Not only did this close reclaim a support zone, but also lead to the Nasdaq out of a bear market. We are now less than 20% down from the highs to current price.
The Dow Jones has done the same. We have closed above the 33,000 zone and are now looking upwards as long as we remain above 33,000.
So there you have it. When it comes to the 20% level for confirming a bear market, the S&P 500 and the Dow Jones have been out of a bear market for over a month. The Nasdaq is the market that just climbed back over the threshold and is less than 20% from the highs. By definition, the bear market is now over for all three major US market indices.
The technicals also confirm this, and major weekly levels have been breached.
However, some are still not sold. Many traders are calling this the most hated rally ever. They believe stock markets will not be able to hold these weekly levels I just pointed out above, and will close below them once more.
And they have some good reasons to be bearish. Recession, and global uncertainty to name a few. What really got the markets going was the fact that July inflation (CPI) data came out less than expected. Still quite high at 8.5%, but the markets are seeing this as peak inflation and the Federal Reserve not coming out hawkish. Smaller rate hikes and even a pause. But as we all know, one data print doesn’t make it a trend. The markets could be wrong, and all it would take for a reversal is for August CPI to come in higher.
I do believe there are two charts that all traders and market watchers of all levels and experience should be watching. Our favorites here on Market Moment.
The first is the 10 year yield. Ticker TNX. Many have observed that when yields rise, markets drop and when yields drop, the markets pop. If the markets are surprised by August CPI, we will see yields rise as the markets begin to price in more interest rate hikes, which would weigh on markets. A drop in yields would be positive for markets as it means the markets are calling peak inflation and a less hawkish Fed.
I should say that when yields are dropping like this, it isn’t always necessarily positive. We are so used to headlines of inflation and the Fed that we forget bonds and a risk off environment. When yields drop, it means money is running into bonds. This is usually a sign of risk off. When traders and investors are fearful and run into the safety of bonds.
All of this gets confirmed by one other chart:
We are seeing quite the pop in the US Dollar to start off this week. Forex traders and gold traders know how strong the US Dollar strength is right now. When I see both bonds and the Dollar rising, it means risk off. Something is spooking the markets. Even the safe haven known as the Japanese Yen is seeing strength.
Major technical levels have been taken out on stock markets, but the real question is if they can hold the breaks. Can we remain above 4200, 13,000 and 33,000 respectively? Or are the bond and US Dollar charts telling us something else?