New bull market or just a bear market rally – that is the question

What happened

After almost a straight decline of 24% since the beginning of the year, the S&P 500 has ripped higher over the past two months. Stocks are up almost 17% since the mid-June low and have risen for four straight weeks. Moreover, a rare price momentum signal triggered last Friday, with an enviable positive track record. Thus, the question becomes – is this just another bear market rally or the start of a new bull market?

Our take

The evidence is mixed. We recognize this is not the answer that most investors want to hear. But, the case for a new bull market is much less clear, for example, than the setup coming out of the 2020 market low, where the weight of the evidence in our work was tilted heavily to the bull camp. Back then, we urged investors to rebalance portfolios and add to equities. Currently, we still view the near-term risk/reward as less favorable.

• Like then, stocks have rebounded after a sharp decline (though the pandemic market decline was much sharper).
• Like then, investor sentiment became so depressed that a little good news went a long way to lift stocks.
• Like then, the initial spring higher was met with disbelief and calls that it was just another bear market rally.
• Like then, one of the most bullish and reliable technical indicators in our work was triggered about two months after the rally commenced. Indeed, the percentage of stocks in the S&P 500 trading above their 50-day moving average surpassed 90% on Friday, rising from less than 10% in mid-June.
  • This shift from indiscriminate selling to indiscriminate buying has been a rare but powerful market signal only happening seven other times since 1990. Each signal has previously been triggered following important market bottoms.
  • After these past signals, the S&P 500 has seen gains 100% of the time over the following 3, 6, and 12 months. The forward 12-month return averaged an impressive gain of 24% (table on the next page).

Thus, this is among the most convincing factors supporting the argument that a new bull market is underway and strong gains lay ahead.