We never actually know that we’ve been in a bull market until well after the bottom.
It’s easy to look back and pinpoint the March 2020 low or the March 2009 low, for example, and say, “That’s when the bear market ended and a new bull market started”.
But in real time, when we’re going through that transition, how can we possibly know?
Well, classic signs of the end of the bear markets are things like historically bearish sentiment extremes and washout breadth levels.
We obviously had both of those as our sentiment readings this summer were the most pessimistic since the Great Financial Crisis, and only 14% of stocks on the NYSE were in uptrends (compared to almost 90% entering 2021).
Those are the things you see just before the market turns.
Now, what are the things you see just after a market turn, around the 2nd inning or so?
Relentless buying pressure coming off historic selling. And that’s precisely what we’ve been seeing over the past month.
Here’s a chart showing the average performance of the S&P500 from 6 months prior to 12 months after a Momentum Thrust Signal:
While it’s not perfect, let’s remember that nothing is.
So the questions we want to ask ourselves, as we wonder whether or not this rally has legs are,
“Did we see what we usually see right before the market bottoms?”
“Are we now seeing what we usually see around the 2nd inning of a new bull market?”
Does this look like all the other times the market put in a major bottom and started a new bull market?
So is this time different?
Are you shorting this rally? Are you betting that we go down and retest, or even break, this summer’s lows in the major indexes?
If you are, then you’re betting that this is the greatest “bear market rally” in the history of the stock market. Because whenever stocks did what they just did, they have never rolled over to make new lows.
So are you betting this will be the first time ever?
How are you expressing your short positions?
Most importantly, what would the market have to do from here to prove your bearish thesis to be incorrect?
Let me know. We love to hear from you.
In the meantime, Premium Members make sure to check out the replay of this week’s Live Video Conference Call. We discussed all of this and so much more. You can also skip right to the Trade Ideas page if you’d like.
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See you in there!