Time for Some Good News?

January 31, 2023

For over the last year I’ve probably been sounding like the merchant of doom. I started warning about the secular inflation we’re currently suffering through since all the way back in November 2021.

I’ve talked about how economic reports are fudged to show a rosier picture than what the prevailing reality indicates.

I’ve acknowledged that the bear market in many stocks (outside of the indexes) has been beating up on investors since March 2021.

But now maybe, just maybe, it’s time for a little good news. And you deserve to know what’s shaping up…

Where Markets Go, Everything is Relative

Here’s something I shared with my paid subscribers last June…

Take a look at this daily chart of the S&P 500…

Source: Barchart.com

It shows a rally from 2,346 to 3,393… a gain of over 44%. Some would say that’s a picture of a healthy bull market. But look at the weekly chart below…

Source: Barchart.com

Zoom out and you get a slightly different picture. Despite the market’s rally to new highs, the “crash” below the previous significant low indicates that it was actually part of a bigger consolidation pattern (bear market).

The moral of the story was…

Remember, everything fits within a bigger picture. So “bull markets” within “bear markets” within “bull markets…”  

And that same moral applies to what’s taking place now. 

Time for a New Bull Leg?

A few weeks ago, I wrote to you about understanding seasonal trend indicators. In that article I mentioned a trend you could call the “midterm reversal” trend…

Since 1950, stocks have come under significant pressure during midterm election years suffering intra-year pullbacks ranging from 4% to a hefty 37%.

But… in each of the following years, the market saw substantial bounce backs returning from 8.7% to a stunning 57.7%!

Every year!

It’s actually a pretty impressive trend. But looking at market trends in a rearview mirror isn’t very helpful so what about this year? How is this indicator shaping up so far? Let’s take a look.

Take a look at the chart below.

S&P 500

Source: Barchart.com

You can see how the market bottomed in October and then, after its latest drop in December, held above that previous low. That’s your first indication that something bullish may be brewing. 

The second thing is the 50-day moving average (the red line) which has also turned up again. Of course it turned up in July of last year too, only to roll back over into a new low in the market. 

The 200-day moving average (the green line) which generally signals the major trend of the market is still firmly in a down trend so you have to be wary of that. Both the market and the 50-day average are rallying to challenge it. But neither have convincingly moved above it so far. (Look at what happened to the market the last two times it touched the 200-day.)

So What’s So Encouraging?

The market breadth. The underlying strength that’s driving a given rally. (I wrote about it way back in December 2021.)

And this time things are looking much more positive. See the charts below…

You can see the successive higher lows in both the market and the advance/decline line. But what is really encouraging where continued upside goes is how the A/D line has shattered through its previous high.

That’s showing a broader participation on the long side of the market into this rally so far this year.

So while remembering that medium-term bull markets can all be part of a bigger bear market, these indicators finally appear to be signaling some good news for the upside.

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily