We would love to know the answer to this question also. Unfortunately, we won't ultimately know until hindsight sets in. How do we try and decide in real time though? The best course of action is to look at what the current data tells us and try to put the probabilities in our favor. Has the character of the market changed and is there evidence that the bear is behind us? Nothing is certain in trading, but to create an edge we need to put the odds on our side. Lets get into it.
Below is a list of all bear market rallies from Milton Berg since 1973. Just one bear market both lasted longer than 37 days and gained more than +14.82%.
For the first time since the Nasdaq topped late last year, the MACD has turned positive during the current rally.
Based on 12 studies on market breadth done by Chris Ciovacco in his weekly market update, the odds are heavily in favor of the bottom being put in. Based on 61 signals over 12 studies, the low was made in 93.4% of cases. Which means there is a 6.6% chance the market can still make a lower low.
Below is a daily chart of the Nasdaq with the percentage of extension above or below the 50 day. We recently hit levels only hit 3 other times in the last 20 years. 2 out of 3 ended a prior bear market. The 2000 rally was a bear market rally that eventually rolled over.
Another measure of breadth thrust from Jonathan Harrier is favorable to the bulls over the next 12 months.
Yet, this tweet thread from Jurrien Timmer explains why it is so hard to spot the difference between a bull market and a bear-market rally. If we look at data going back to early 1900s, breadth advances are associated with new bull markets and bear market rallies.
Breadth readings during new bull markets:
Bear market rallies:
The current rally in the S&P has retraced 50% of its losses from peak to trough. As Jurrien states, "So, on a historical basis, if this rally advances much further, it will be hard to conclude that this is not a new bull market. This is one of the few technical clues out there. If this is a bear-market rally, it likely has gone as far as it will go."
Below is a chart from Ned Davis comparing bear markets depending on whether or not a recession occurred.
One way we gauge sentiment is the monthly BofA fund manager survey. Below are the key takeaways from the most recent month.
Cash still remains elevated showing the wall of worry traders still have.
From a contrarian perspective the % of investors that think the global economy will experience a recession in the next 12 months is the highest since May 2020. The prior peaks were good buying opportunities.
If we avoid an earnings-led recession but continue to have a valuation reset the outcomes are very different. This is the price analog from Jurrien Timmer that was discussed in our last blog and remains an interesting guide post.
The evidence favors a market that has bottomed and will continue to climb the wall of worry and rally higher. The wild card remains if we get a bigger and nastier recession and this is nothing more than an extended bear market rally within the context of a longer bear market. A third scenario remains, in which the market has bottomed but finds itself trend-less for an extended period before resuming higher. Even with all the data presented it still remains difficult calling this a new bull market or a bear market rally. At the end of the day we really won't know until it's over what type of bear market this will end up being. What matters most is the price action and right now it favors a strong rally. When the evidence and facts change we will adjust accordingly.
