What Just Happened In The Markets?!

Today — Thursday, October 13, 2022 — was a rather strange day and probably a turning point for the U.S stock market. At first, markets seemed to be shocked by the higher than expected consumer price index (CPI). Consumer prices increased 0.4% month-over-month and 8.2% year-over-year and when the news broke the market crashed within minutes. In the end, however, the S&P 500 was up almost 3% for the day.

Despite the positive day we should not forget that U.S. stocks are clearly in a bear market with the S&P 500 down about 25% since its previous all-time high. And I am pretty sure that 4,800 points for the S&P 500 was the cyclical high and the end of the bull market (as I consider higher prices extremely unlikely). But in the next few weeks, the S&P 500 could move higher again and into the region between 4,150 points and maybe 4,300 points.

And there are many reasons for a bear market rally, that might push the S&P 500 about 20% higher in the next few weeks and months:

Sentiment is extremely negative: Everybody is expecting the world to end and the stock market to crash. For example, the AAII Sentiment Survey is showing extremely high bearish sentiment and the CNN Fear & Greed Index is still showing extreme fear. But usually, the opposite happens: When everybody is assuming one scenario (in this case the stock market crash) it doesn’t happen.

The stock market is oversold: After declining 800 points in the last few weeks, the S&P 500 (and many other stocks and indices) seems oversold at this point and a reversal is becoming likely.

We are at a strong support level: The S&P 500 is trading at the 200-week simple moving average, which is a strong support level and could lead to U.S. stock market higher in the next few weeks. The S&P 500 is also trading at previous highs and lows (see green line in chart above) and created a potential double bottom.

Bullish upward waves during a bear market are not only a possibilty but part of every bear market. Stocks, indices — basically every asset trading on a stock exchange is moving in waves. And therefore it is not surprising that a downward wave as we have seen one in the last few weeks is often followed by a bullish counter-wave.

However, this is not the time to invest big. Don’t forget that we are still trading close to a CAPE ratio of 30. And usually, the stock market topped at CAPE ratio around 30 and did not find its bottom.