The U.S. stock market continues its treacherous year, with the S&P 500 year to date declining over 20% and the Nasdaq Composite Index posting a 28% decline as of June 22. The sharp price declines in equities were driven by the Federal Reserve raising rates and reducing its balance sheet in an attempt to slow inflation. Additionally, the economy slowed, particularly in the housing sector. The negatives were exacerbated by the war in the Ukraine and the uncertainty regarding the upcoming midterm elections. Unfortunately, we continue to believe the final low of this bear market cycle hasn’t been reached.
However, even though the long-term bottom may not have been reached, equity markets rarely move in a straight line. On a short-term basis, U.S. equity markets are coming from an extremely oversold level. History suggests that it would be logical to expect a bear market rally soon. While there is risk involved, we think there is an opportunity for nimble investors trading a countertrend rally.
Below are the S&P 500 bear market statistics for the past 50+ years. As one can see, the current bear market is still below the average and median loss for similar bear markets. Perhaps more importantly, from a time perspective at 164 days, the current bear market is very short. If this bear market were an average length of time, it would be roughly only one-third over.
If we examine these past bear markets, an exclude the 1987 and 2020 markets which had a V-shaped recovery (2020), or no additional undercuts of first lows (1987), we find five extended S&P 500 bear markets since 1970. These five averaged about six failed Follow Through Days (FTDs). We define an FTD as an upward move of 1.7% or greater (historically used 1.2% or greater) in the market,…