- According to a Wall Street Journal piece posted over the weekend, global investors haven't been “this bearish on the stock market in more than a decade”.
- About the same time, MarketWatch posted an article talking about how the S&P 500 was poised to move out of bearish territory if it was able to extend last week's rally.
- In my book, not being a global investor or economist, not only did the S&P 500 move into an uptrend last October but it also moved out of bearish territory.
A couple stories caught my eye over the weekend, both of them having to do with the S&P 500 Index ($INX). As you know, I’ve been bullish the S&P since last October when it posted a spike reversal on its monthly chart. This told me the previous long-term downtrend that had begun with a bearish key reversal during January 2022 had come to an end, albeit 8 months before It was expected to. For the record, using a count of 18 months (roughly the average length of a downtrend for the S&P), the previous downtrend was expected to turn up during June 2023 (this month). But that’s markets for you, thanks to Chaos Theory the only thing predictable is unpredictability.
In a piece I wrote from early April 2023, I highlighted three key points:
- It is important to remember the economy does not equate to stock markets.
- Economic indicators were not as bearish as many were talking about at the time.
- Historically, there is a correlation to the S&P 500 gaining 7% the first quarter and the rest of the calendar year.
I did the math later in the previous piece, and depending on how reads the correlation the 2023 upside target was between 4,722.60 and 5,054.45. It’s this little statistical nugget that made one of the pieces from this past weekend that much more interesting.
In an article posted Sunday, June 4 a Wall Street Journal article opened with the line “Wall Street hasn’t been this bearish on the stock market in more than a decade”. This according to Bespoke Investment Group based on analysis of data compiled from the Commodity Futures Trading Commission. My Blink reaction was, “What happens when/if investors start covering those bearish bets?” A bit further into the piece the author (Hardika Singh) has a quote from Mr. Jake Gordon at Bespoke Investment Group, “Of course, pessimistic positioning of this scale can be a contrarian indicator”. So, in a nutshell, what is viewed as bearishness toward the S&P 500 by the investment community could actually be nothing more than a bullish indicator. Got it? Good.
The other piece of interest had to do with the ongoing rally by the S&P 500. Friday afternoon MarketWatch had an article talking about how the S&P was set to climb out of bearish territory. According to traditional definition, a stock index turns bearish once it loses 20% of its value. In the case of the S&P 500, this initially happened during May 2022 as the index dropped below 3,871.28, a 20% decrease of its January 2022 high of 4,818.62. Eventually the S&P 500 would make its way to a low of 3,491.58 during October before completing its bullish spike reversal.
According to the MarketWatch piece, investors are now calculating a 20% rally off the October low before calling the S&P 500 bullish. This buts the threshold at 4,292.48 based on the low daily close of 3,577.03 from October 12, 2022. Naturally, since I didn’t go to investment school, I have a different view of bullish and bearish that what is traditionally discussed.
In my book, the S&P 500 rallied more than 20% when it got above 4,189.90 (the October low X 120%) during May. While the index closed just below that mark, it has stretched its uptrend to a high of 4,290.67 in early June. Yet another way to think about it is the S&P 500 turned bullish when it got back above the initial 20% loss level of 3,871.28. This makes sense to my simply way of thinking. If that was the threshold into bearish territory on the way down, it should be the same back into bullish territory as the index trends up. If so, it puts an even brighter spotlight on last October’s activity as the index posted a high of 3,905.42 before closing at 3,871.98, just a hair and a freckle above the bearish threshold.
Is the S&P 500 still bearish? I don’t think so. Time will tell if and/or when global investors agree with me.
