Is this the start of a new bull market?

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What a day in the markets.  This morning, the US published its latest official inflation reading, and it came in better than Wall Street expectations for the first time since this whole inflation trend began. The market’s reaction was immediate, sending the S&P 500 up ~4% and the tech heavy Nasdaq up over 6%. And that buying frenzy continued throughout the day, with the S&P 500 closing the day up over 5.5% and the Nasdaq up 7.35%.

The logic behind this massive rally, the biggest one since coming out of the Covid crash in 2020, was that with inflation seemingly having peaked, then the Fed would start to ‘pause’ on their rate raises. Markets are always forward looking, so with today’s inflation data, the markets jumped on that lower rate theme.

So, the big question now is, have we seen the bottom of this bear market? Could be, but we doubt it. Here is a chart that we have shown our subscribers a few times over the last couple of months.  It shows the 4 phases of a bear market:

  1. Stealth –  where the Smart Money enters the market
  2. Awareness  – sees Large Speculators enter the market
  3. Mania – this is where the retail or what we like to call the Masses buy in
  4. Blow-off – Where the market starts to turn down

At the top of the mania phase, everyone wants in, even those who haven’t ever followed the stock market…FOMO – Fear Of Missing Out. The 2021 REDDIT crowd pushing up ‘meme’ stocks like GameStop and AMC was a classic example of a Mania Phase top.

The Blow-off phase is where we get investors fall into denial, hoping the market rallies back to the highs, but it just keeps going lower. Then capitulation kicks in and ultimately, we get despair at ‘the bottom.’

When we look at those phases and overlay the current S&P 500 chart, it suggests we are the Blow-Off phase.

This would tell us that any rally here would be another short-term relief rally, maybe a few weeks, even a month.

We still need to see ‘capitulation’ and ultimately ‘despair’ kick in to finally hit the bottom

So based on all that, we would suggest we are still in a bear market. Now that doesn’t mean we can’t have a solid rally through year-end, but until we hit that capitulation and despair, we are not likely to hit bottom just yet.

Here is another chart we keep showing subscribers to remind them how volatile bear markets can be. It shows how from early 2000 to late 2002 the Nasdaq had 8 significant rallies, all over 16%, but still, over that period, the Nasdaq lost 75% of its value.

So, while we could certainly see a strong rally here, be aware of how bear markets usually end in capitulation and despair.

Stay tuned!