ACTV - The Bear Market Is Almost Over

2023-04-03 07:46:29 ET

Summary

• The major market indexes had their best weekly gains for the year last week, which also resulted in back-to-back quarterly gains.
• The exclamation point was a better-than-expected inflation report for the month of February.
• Several developments since the beginning of this year with bullish historical precedents point to more gains in April and the end of the bear market in the months that follow.

The major market indexes finished their best weekly performance for the year to close out the first quarter, which makes for back-to-back quarterly gains. The exclamation point was a better-than-expected inflation report on Friday, increasing the likelihood that short-term interest rates have peaked for this cycle. That has helped fuel a rebound in growth stocks, led by the technology sector, as financials and more value-oriented names have lagged. Yet I expect breadth to start improving again as we move through April, leading the S&P 500 to close in on a bull market gain of 20% or more from its October bear market low.

Every month the inflation hawks keep warning us about price increases, but every month the annualized rates of inflation keeps falling. On Friday, we learned that the personal consumption expenditures ((PCE)) price index increased just 0.3% in February, which was less than expected and half the 0.6% increase in January. The core rate that excludes food and energy also rose 0.3%, which was down from a downwardly revised 0.5% in January. The year-over-year rate fell to 5%, while the core ticked down to 4.6%. The disinflationary trend that began last June is firmly entrenched. We should fall to a range of 2-3% by year end, which would be sufficient to realize a soft landing.

Consumer sentiment remains at depressed levels, which I find to be encouraging from a contrarian point of view. I think the constant warnings about a recession by pundits have consumers on edge, but that has not translated into a concerning slowdown in economic growth, as real spending growth sustains itself. The good news out of this report is that inflation expectations for the year ahead declined again in March to 3.6% from what was 4.1% in February. That has to please Fed officials, even if they won't openly admit it.

Institutional investors are just as sour, as measured by the actual trades they place, which is tracked by an index managed by State Street. It has yet to recover from historically low levels it reached late last year. Again, I view this as a positive from a contrarian standpoint.

I want to finish with a review of some of the bullish developments that have occurred since the beginning of the year leading up to April, which has historically been a very strong month for stocks in pre-election years. The S&P 500 has risen in 17 out of the last 18 Aprils dating back to 1950 for an average gain of 3.48%.

I think the probability for gains this April improved after the Golden Cross that occurred for the S&P 500 in early February, which is when the 50-day moving average crossed above the 200-day moving average.

This was a very bullish development, as presented by Rob Hanna at Quantifiable Edges in the data below. The S&P 500 index was created in 1958. Using data since that time, the Golden Cross produced positive returns 76% of the time once the 50-day fell back below the 200-day. More importantly, the drawdown during those positive-return periods never exceeded 8.7%. Therefore, it comes as no surprise that the drawdown after the latest Golden Cross, which occurred at 4,173 on February 2, was a low of 3,808 in mid-March. That works out to be 8.7%, which has been followed by a rebound to more than 4,100. Will it continue? The April statistics suggest it will.

It gets even better when we consider that the S&P 500 posted a gain of more than 4% in January, which technical sage Wayne Whaley points out has resulted in positive return in the eight months that followed in all 21 occurrences since 1950. This January's gain of 4% was special because it was followed by a loss in the month of February. That has only occurred eight times since 1950, and the S&P 500 was higher in all six-month periods that followed by an average of approximately 10%.

This collection of data during the first quarter does not serve as the foundation for my outlook for a soft landing for the U.S. economy or new bull market for the S&P 500, but it sure does a great job in reinforcing that outlook. It gives me a lot of confidence to say that the bear market for the S&P 500 will be over sooner rather than later. I remain in wealth accumulation mode.

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