Is This A New Bull Market?

September 7, 2022

Where are we in the cycle?

That's something I like to think about.

The reason is because it helps me allocate my time better. Should I be spending more time looking for stocks to buy, should I be spending more time looking for stocks to sell, or should I be at the beach because the market is a mess?

Being able to answer this question correctly can be a huge advantage.

I think blindly incorporating a specific type of strategy at all times, regardless of the market conditions seems awfully difficult.

If we can first identify what type of market environment we're in, then we can pick and choose which tools and strategies are best fit for that part of the cycle.

Are we in a high volatility environment? Then why would we implement strategies that are best suited for low volatility environments?

Are we in a trending market environment? Then why would we use the tools and strategies that are best for sideways rangebound markets?

I think we first identify where we are in the cycle, and then decide how to approach the market from there.

We do this by weighing all of evidence. And to be clear, I mean all the relevant evidence.

So, are we in a new bull market or what?

First, I'd like to reiterate that it's probably best to worry less about the name itself, "bull" market or "bear" market, "cyclical" or "secular".

What's more important here is just understanding the math behind how trends work, how their born and how they die.

So let's talk about it.

What do we normally see before new bull markets begin? Or new cyclical uptrends? However you choose to define this.

What do we regularly see?

Massive drawdowns in price. Wash out levels in breadth. Extremes in bearish Sentiment.

Did we see all of those?

Yes.

The average stock in the Nasdaq fell 43%. A lot of the "Blue Chip" Growth stocks fell 60-70%. The new highs list peaked in February 2021, that was 19 months ago.

You can argue that some sentiment levels were not quite extreme, but in aggregate it's hard to say that we didn't see extreme pessimism in many ways.

Next, what do we then see in the early innings of a new bull market?

We see an expansion in breadth, even to levels we refer to as "thrusts".

This summer, for example, we saw expansions in the new 21 day highs list. We saw certain sectors and ETF volume and momentum readings hit historic levels as well.

Great.

Now what does the back half of the 2nd inning, 3rd, 4th and even 5th innings of a bull market look like?

And have we seen those yet?

In my view, no we have not.

In this part of the cycle, that's when you see the sector rotation. New leadership, or former leadership emerges.

We also, mathematically, need to see further expansion in breadth.

Rather than just the 21 day highs list, you see expansions in the 63 day highs list and % of stocks above their 200 day moving average, for example.

This is what we're looking for. We haven't seen any of it.

Now to be clear, we haven't seen enough to invalidate the pre-bull market signals, we haven't seen enough to invalidate the early inning signals, but at the same time they haven't been confirmed either.

So finally, of course, there's the catalyst.

And in this cycle, the strong negative correlation between stocks and the US Dollar has been the driver here. Without a weaker Dollar, it's going to be hard for a new bull market to emerge.