September 28, 2022
Good morning,
Picking up this morning where we left off in Monday’s Morning Note, it appears the market has raced down to its June lows (in S&P 500 Index terms). In the past six days alone, the Index is down -6.5%, the worst span since February 2020 and the beginning of Covid.
In the four-step bottoming process mentioned here during each of the three bear market rallies this year – oversold, rally, retest, and breadth thrusts – June’s low is being tested (it is incorrectly labeled retest, but…). There are rules to follow for a test to officially qualify as pass or fail. And it is too soon to draw a definitive conclusion, but results so far are not good for the bulls. The June low looks like it will officially fail, and the market will have to restart the four-step bottoming process again.
Rallies in bear markets are most often caused by markets getting oversold. Measures of overbought and oversold conditions are simply data points describing investors’ emotional mindset and range from optimistic to pessimistic extremes. Bear market rallies are fueled by extreme pessimism, a condition known as deeply oversold. Before this year’s March, May, and June-August bear market rallies began, oversold readings were at their extremes, just as they are now.
Without swamping you with a series of charts, based on several measures of crowd psychology, conditions are favorable for another bear market rally just ahead. Could the next bear market rally pass the four-step bottoming process and define this bear market’s low a few months from now. It certainly could but it is less likely to unfold that way if the Fed has as much tightening ahead as they warn of. In the meantime, let’s take what the market gives us and enjoy the relief a bear market rally offers if it develops.
Be well,
Mike