Over the last week, the S&P 500 (SPY) is up by 5.5% with even bigger advances for the Nasdaq and the Russell 2000. Gains were…
pretty strong across the board as well.
This is another change in character for the market as previous advances in 2022 have featured weak participation.
Some reasons for the market rallying are Q2 earnings that are pretty resilient, while inflation continues to move lower. And, this comes about in an environment that featured record levels of bearish sentiment by many measures.
Bear Market Rally Thoughts
[I shared these thoughts about a bear market rally in my Monday commentary for POWR Growth subscribers. This is an excerpt with some modifications for stocks under $10. ]
Today, I want to put on my bull hat and argue the other side. First, I don’t think another bull market, beginning from here, is possible.
Instead, I do think a bear market rally could happen and is something that we should consider a possibility. Although, it does require a series of positive catalysts.
First of all, sentiment is extremely bearish. This means that any positive news could spark a big rally. As noted, inflation falling is a bullish force that has been providing support to long-duration assets. China is easing. Earnings haven’t been as bad as expected.
If we look back at previous bear market episodes, we find powerful bear market rallies between 15 and 25% that lead to sentiment becoming bullish or at least neutral. We haven’t had one yet, which means that we are due.
Now, let’s throw some harsh reality on that pretty picture…
A lot of ifs are necessary for a big bear market rally to come to fruition. And, each of the bullish catalysts could fizzle as they have for much of this year. Let’s go through it:
Bearish sentiment in a bear market is a useless indicator. Inflation has failed to decline despite many forecasts of it declining. Anyways, it’s not falling because we added new capacity to the economy, it’s going down due to an impending recession.
Chinese stimulus hasn’t flowed into the economy because of Zero-COVID policies. And, earnings season is only beginning, and analysts continue to forecast positive EPS growth in Q3 and Q4.
Targets + Applications for Our Portfolio
In terms of how far we could go, I believe a reasonable target would be around…
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