October 31, 2022
Good morning,
Happy Halloween. We say goodbye to October today, not terribly surprised that it is handing us off to November in the midst of a rally in equity markets. While Octobers tend to do that, what has been a surprise is just how remarkable the rally off the recent lows has been. The S&P 500 has jumped +9.1% in just 12 trading days. With one day left in October, the Dow Jones Industrial Average is on pace for its best October ever, the best month since 1976, and 9th best month in its 122-year history (Bloomberg).
This is not the first strong rally of this year. In March, May, and June-August, the S&P 500 rallied at least 7%. In each of those rallies, several, but never all short-term breadth thrust indicators fired positive buy signals. Recall that breadth thrust indicators are technical measures of market strength at the beginning of a rally. There are two kinds of rallies in a bear market, the kind that is often explosive initially, but ultimately fail as the market moves down to new lows – these are labeled “bear market rallies.” The other kind of rally only occurs once per bear market. It is also initially explosive, but it does not fail. It rolls onward and upward defining the end of the bear market.
The underlying market structure has changed so much over the years, with the advent of ETFs, algorithmic trading, and decimalization, that short-term breadth thrusts are no longer sufficient evidence of a rally to end a bear market. More technical evidence is needed today, such as confirmation from intermediate-term and long-term technical indicators, to say the technical picture is positive.
So, with all that said, what can we say today about the character of the current rally? So far, it has been explosive enough to be considered as a possible bear market ending rally. Like the first three rallies of this year, many short-term breadth thrusts have fired in the past week. However, unlike the first three rallies, two momentum indicators (intermediate term indicators) that were not head faked in earlier rallies this year have registered their most positive readings in years (Ned Davis Research)
Whether the current Q4 rally can continue into 2023 will likely depend on macro factors like whether inflation rolls over enough for the Fed to pivot or if earnings misses are limited to isolated industries and stocks. Technical indicators will likely tell us the rally is sustainable before economic and fundamental data do. In the technical department, this rally is now different than the previous ones this year. It does not yet mean it will be the rally that ends this bear market, but it can be, and that is different.
Be well,
Mike