Let’s consider this latest stock market rally.
First and foremost, the price action for stocks in 2022 had been EXTREMELY bearish. The S&P 500 experienced EIGHT consecutive down weeks from late March until mid-May of 2022. Even more striking, from mid-March until early July, only THREE out of the 15 weeks had been up.
Historically, in any given week, stocks rally 56% of the time. So, the stock market’s performance has been extremely unusual in 2022. In this context, the market was overdue for a significant rally when stocks began to form a base in June-July.
Indeed, at the June lows, the S&P 500 was trading a whopping 11% below its 50-day moving average (DMA). I’ve illustrated this level in the below chart with a blue line. As you can see, this is an extremely rare occurrence having only happened two other times in the last 10 years: the COVID crash and the Fed 2018-policy error which blew up the debt markets.
My point is that stocks were EXTREMELY oversold and stretched to the downside in mid-June of 2022. So, the stage was set for a bear market rally.
However, I have to emphasize that this is a bear market rally. Which means the next leg down is coming. The below chart tells us the story… though it’s not one the bulls want to see.
