Follow the bouncing bear

08/03/22
  • S&P 500 up roughly 12% from mid-June low
  • Bear-market bounce or correction-ending rally?
  • Past bear rallies ranged from less than 5% to 24%

Are we in a recession or aren’t we? Has the stock market correction ended or is the recent rally just a bear-market bounce?

Those looking for unambiguous answers to either question are bound to be disappointed. The definition of “recession” is fuzzy, at best, and regardless of the method used to define one, economic contractions can only be identified in retrospect—after they’ve started or, in some cases, even after they’ve ended. (For what it’s worth, in the US, the National Bureau of Economic Research is the “official” designator of recessions, and it has yet to declare one.)

Bear markets represent a similar challenge. It’s no more possible to identify a bear-market low in real time than it is to identify the market high that preceded it. In early 2022, even those rare sages who may have anticipated a significant market downturn had no way of knowing January 3 would be the S&P 500’s (SPX) highest high for at least the next seven months.

But the market’s rebound off its mid-June lows has prompted discussion of whether this bear market may have already found its low. As of last Friday (the highest close of the current upswing) the SPX had rallied more than 12% since June 16:

Chart 1: S&P 500 (SPX), 12/31/21–8/2/22. S&P 500 (SPX) price chart. This year’s biggest rebounds.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


Even if the market turns lower immediately, this would be the biggest rally of the year, a little larger than the 11% surge in the second half of March. Does a move of this size suggest the market may have found its footing? The following table shows notable rallies that occurred within bear markets before they hit their ultimate lows, limiting the list to five from any single bear, and excluding any moves smaller than 4%:

Chart 2: S&P 500 bear-market rallies, 1962–2022. 4%-or-larger bounces.

Source (data): Standard & Poor's and Power E*TRADE. (For illustrative purposes. Not a recommendation.)


The bounces ranged from a little less than 5% to more than 24% (the median was 10.4%), and lasted anywhere from a few days to more than three months. The following chart, which shows only the two biggest rallies within each bear market (if there were two), highlights the fact that while both of 2022’s major rebounds (highlighted) are a little bigger than the typical bear-market rally, they’re well within the overall range, and only around half the size of the largest examples:

Chart 3: Top bear-market rallies, 1962–2022. 2022 bounces slightly larger than typical bear-market bounce.

Source (data): Standard & Poor's and Power E*TRADE. (For illustrative purposes. Not a recommendation.)


In other words, in the past the SPX has often rallied roughly as much or more than it has during this year’s two upswings before reaching its bear-market low.

While that doesn’t mean June 16–17 won’t turn out be this bear market’s low, it may be reason to remain cautious. On Monday Morgan Stanley Wealth Management described the recent market action as a bear-market rally driven by mistaken perceptions that inflation has been conquered and the Fed could start cutting interest rates as soon as next March.1

Also, while “Tracking the bear” showed that in most cases the majority of the market correction was already over by the time the SPX fell into bear-market territory, if mid-June does, in fact, turn out to be the low, this will have been one of the mildest bear markets of the past 60 years.

Market Mover Update: Open interest increased in the Otis Worldwide (OTIS) put options that accounted for the majority of Monday’s volume surge, which means much of that trading represented a trader (or traders) taking new positions (see “Calls rock, but puts roll”).

Today’s numbers include (all times ET): Mortgage Applications (7 a.m.), PMI Composite Final (9:45 a.m.), Factory Orders (10 a.m.), ISM Services Index (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: CVS Health (CVS), Yum Brands (YUM), Moderna (MRNA), Albemarle (ALB), Allstate (ALL), Royal Gold (RGOLD).

 

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1 MorganStanley.com. Mission Accomplished. Not! 8/1/22.

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