Yesterday’s explosive move higher is exactly the kind of thing traders should have been expecting. As I wrote last month Grab for a bottomIt turned out that the risks were extremely one-sided:
“The risk here seems asymmetric: The downside appears to me to be a potential grind low — Fed over-tightens, then keeps over-tightening; Maybe earnings miss badly; What if the mild recession we’re talking about turns out to be much worse than expected?
But the upside seems potentially explosive: a soft CPI print (imagine years with a 6-, or heaven forbid, a 5-handle!) or a really bad NFP report; What will happen to oil prices if Russia withdraws from Ukraine?
As seen in the table above, the 7.4% gain in the Nasdaq was one of the 20 biggest gains since 1971. But the table is off on a few things, and I wanted to break out of my stupor (I have a mild case of covid) to clarify a few things about what we’re seeing.
Exactly as JC to identifyThe table mislabels what is and is not a bear market1
You can use any definition you choose, but choose wisely, because choosing a description that correlates poorly with reality will hurt your investment and business.
My position is that every one of the big moves listed on the Nasdaq has occurred in the context of a bear market (for the major big-cap indices). We also know from history that big moves up and down tend to cluster together in bear markets, making times particularly difficult.
But as I highlighted above, it’s in the first column where the table gets really interesting: about 25% of the time, these giant moves mark the opposite direction of the previous trend. That means, about 1 in 4 times,2 A huge rally in the Nasdaq marks the end of a previous downtrend and the beginning of a much more constructive period. It’s not enough to rely on as a trading rule, but it should be enough to get your attention.
As I observed yesterday:
We have been in a secular bull market since the summer of 2020; Selling off this year = Cyclical bears within a broader secular bull rather than a full-on secular bear market.
You never know what the end of a cyclical bear is but a huge breadth + a huge push above average volume is a good start. pic.twitter.com/Qb9ERgI4lz
— Barry Rietholtz (@Rietholtz) November 10, 2022
I think that’s a fair assessment of a market that seems to want to go higher in an economy that’s still fairly strong, with plenty of stimulus around and plenty of capital looking for a home.
There may be a market already Bad news worked into price (highest probability). Random factors remain war, FTX/crypto, inflation, and as always 9) something else completely unpredictable. Sure, the FOMC can still screw it up, but we should hope they find religion soon.
Of course, something can always come up to derail it — markets are exercises in probability, not forecasting competition. But Thursday’s move was very encouraging.
Given the list of the 20 largest Nasdaq moves since 1971, it’s not unreasonable that yesterday’s move reflects the asymmetric risk to the upside we discussed earlier; And that markets are in the bottom process, and yesterday may very well be a signal that we have a lot more upside to go.
I remain constructive on equities and even short-term bonds have become much more attractive.
in the past:
Jumping Down (October 14, 2022)
7th Inning Stretch (September 30, 2022)
Counter trend? (August 15, 2022)
Big Up Big Down Days (May 5, 2022)
The end of the secular bull? Not So Fast (April 3, 2020)
Bull and bear markets
1. I’ve defined bull and bear markets over and over, but the easiest way technicians use is when a bear market ends when markets break out of the bear market trading range and make new all-time highs.
2. Actually, 6 out of 20, or 30%. To come up with a better statistic, we need to look at the full list of big up Nasdaq days against the top 20. Maybe give it more than 3% or 4% or 5%; We can’t just rely on tracking the top 20 and assume it’s a comprehensive enough data set.