Challenging Middle – Big picture

The S&P 500 stocks are above their 200-day moving average

We now enter the most challenging part of the bear market: Tired in the middle.

It’s that part of the bear cycle where we’ve come a long way to scare the BTFD crowd. There is an abundance of bears. More importantly, the more technical indicators are sold, the closer they are sold. It encourages those who have the worst behind it.

So we assemble.

But it may be nothing more than a relief rally, a way to work from a deeply sold state. We usually discussed this idea ~ two months ago in “Many Bears.”

Consider a few indicators that most of the time, not particularly informative, but in the extreme, can be very useful:

A 200 days away from the moving average: The S&P 500 was 16.9% below the 200-dma, a fairly dramatic move below its trend line.

A Percentage of stock above or below the 200 day moving average: Only 11.3% of S&P 500 stocks are trading above their 200-dmas last week When the percentage of SPX stocks trades below their 200-day moving average (dma).

A Instability: The VIX rose to 31.1 last week – higher, but not the sort of capitulatory level we’ve seen before.

A Put / call ratio: Increased above 0.80 – above average, but not extreme.

A Consumer sentiment: At 59.4%, it is lower than 1990 (65.5%) and 2001 (82.7%) but above 2008 (55.3%) and 2011 (55.8%) levels.

The market is deeply overpriced, but not necessarily at a level that has stabilized. This reduces the likelihood that this assembly will be sustainable and it will only increase the likelihood of a bear market relief assembly.

Over the weekend, I must have seen a dozen historical analogies, all of which look like where and when to buy: pre-market action during the inflationary cycle, key 2nd By the year of the presidential cycle (or midterm market), average pullback during Fed rate hiking cycles, moderate downtime during recession, average length / depth of correction, etc. I’m sure there are many more.

Be careful. The current cycle is so unusual – epidemic lockdowns, revenue stimulus, wage hikes, inflation spikes, supply chain problems, ongoing global epidemics and a Fed excessive response – that previous cycles do not fit very well. Beware of any analyst or predictor who has too much confidence in his favorite historical analog.

One last thought: The key below or below is how markets trade in an over-sold rally: Can we get a day’s wonder? An intraday reversal where a strong future cannot be sustained? Can the market combine a string of days and weeks where sellers are tired and buyers raise prices to increase volume? Or, are we just selling so much that the rubber band has been pulled so far that we get a snapback that fails to hold up?

We’ll find out soon enough. My suspicion is that we haven’t done enough in the negative aspects to stay under a real one – it’s just a gut feeling, take it as my educated guess.

Many Bears (May 3, 2022)

Unilateral Market (September 29, 2021)

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