What you need to know about bear market rallies

As stocks rallied this week, there were daily comments on one of the financial networks about whether the market had bottomed or the March 14 bouncethe under just a bear market rally.

Several experts expressed their views on this very issue. Some who stood by their opinions did not willingly say what would change their opinion. I generally ignore such opinions as, in my experience, the use of the terms “never” or “always” is not appropriate when it comes to the financial markets.

In the past week I laid out some of the reasons why I thought this was more than a bear market rally. Stock market gains supported my analysis as the Nasdaq 100 was up 2.3% and is now up 4% in March. For a change, the Dow Jones Utility Average was the star performer, gaining 3.4% last week and showing a strong year to date (3.4% YTD gain).

The S&P 500 had another strong week as it rose 1.8%, which is slightly better than the 1.7% rise in SPDR Gold Trust (GLD), which shows a solid 6.7% gain to date. date. Many strategists point to the impressive gains on March 14the lows as a reason this has to be a bear market rally and not the end of the correction from the late 2021 highs.

The Invesco QQQ Trust (QQQ) is up 13.2% since March 14the $317.06 low but still below the 50% retracement resistance at $363.08. The most watched Fibonacci 61.8% resistance is at $373.85 and a close above this level would be another sign that this was more than a bear market rally. QQQ now has good support at $345.05 and the monthly pivot.

The Nasdaq 100 A/D line has broken its downtrend b-line and moved above its now rising WMA. The next major resistance level is the high from early February. The weekly A/D line is rising but still below its WMA. The volume on the rally has not been impressive, which is reflected in the fact that On Balance Volume (OBV) is still below its downtrend c-line. Weekly OBV (not shown) is positive and above your WMA.

This rally has not been as impressive in Spyder Trust (SPY), as it is up 10.3% since February 24.the minimum of $410.64. The 50% resistance at $445.31 was broken last month. Friday’s close at $452.64 was just below the 61.8% resistance at $453.49. February highs are at $458.12, line a. Some bearish technicals are eyeing the 4600 level on the S&P 500. Last week’s close was well above the 20-week EMA at $445.73. A drop below last week’s low of $440.68 would be a short-term negative.

As noted last week, the S&P 500 A/D line closed above its WMA and moved higher last week. This is a positive sign for the medium-term trend. The weekly NYSE Stocks Only A/D line (not shown) has now also moved above its EMA supporting the S&P stock. A drop in the S&P 500 A/D weekly line below support (line b) would be a negative sign for the intermediate trend.

Many investors may not have been in the stock market during the bear market rally from March to May 2008. I would consider this the last significant bear market rally. Bear market rallies are an essential part of the bull-bear stock cycle.

In my observations, the key function of a bear market rally is to change investor sentiment, convincing them that they no longer need to fear a further downside. This briefly injects capital into the market, raising share prices enough for a selloff to occur, leading to a further decline.

Corrections in a bull market play a similar role, as the decline must last long enough and fall low enough for investors to sell because they fear a further decline. That was certainly what happened in the last quarter of 2018, as many were convinced to sell after a nearly three-month slump.

The percentage up from the weekly survey by the American Association of Individual Investors (AAII) is usually pretty good to track these changes in sentiment. In this 2007-08 S&P 500 daily chart, I have labeled various highs and lows with the percentage of investors who reported being bullish that week (bullish).

For the low of January 23 (point 2), only 25.4% were bullish. Over the course of the decline, bullish sentiment tends to wane. After a 9% bounce over 24 days, the bullish % had improved to 34.3% (point 3). On the next drop, the S&P 500 made a new low during the week of March 10th and the % bull dropped to 20.4% (point 4).

From the October 11, 2007 high of 1,576 to the final correction low of 1,257 on March 27, 2008, the S&P 500 was down 20.2%. Ten days after the March 27 low, the 38.2% resistance level at 1379 was broken.

By April 7, the S&P 500 had reached a high of 1,386, and the % up had more than doubled from the March low of 45.8%. This reading was followed by a sharp market decline and the following week’s % up was 30.4%, but it was still in an uptrend.

May 2North Dakota the 50% resistance was also broken at 1417 as the bullish % had risen to 53.3% (point 5). The following week, the bullish % was also high at 52.8%. The week of the May 19 high, the % up had fallen to 46.3%.

On May 19, the S&P 500 peaked at 1440, just below the 61.8% retracement resistance level, and then closed at 1426. The S&P 500 closing below support from the March lows indicated that the bear market rally was over. It had lasted 45 days.

It should come as no surprise that the public’s perception of time is much shorter now, so after a twenty-one day rally since February 24the lows some bearish analysts begin to modify their positions. Many newsletter writers I interviewed in February 2008 were no longer bears by May. In July the minimums of March 2008 had been violated.

The other big news item last week was the parabola around yields, especially short-term rates. The 3-year T-Note yield closed at 2.51%, the 10-year 2.48% and the 30-year 2.60%. The 3-year yield broke resistance at 0.3%, line c, in February 2021 it has more than doubled in 2022.

Economic data was no worse than expected last week and some manufacturing data was better. There is more economic data this week with the GDP and then the monthly jobs report on Friday. Sentiment about the economy is not very optimistic and appears to be getting worse.

A yield curve inversion is likely over the next week that would bring the recession to the headlines. It may convince even more investors that a recession is inevitable. I would wait to see the data for the next two months before coming to that conclusion.

There are still a number of buying opportunities that come up each week, but until the A/D lines start trending higher, I would not chase prices and continue to respect risk on any new position. Once the 61.8% resistance levels are broken and all the weekly advance/decline lines turn positive, I will become even more convinced that this is not a bear market rally.

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