Since it bottomed on October 12 last year, the S&P 500 is up 13%.
A bull market is a 20% or more rise off a low. So, we’re not quite there… but it’s been steadily climbing for weeks.
And despite the drumbeat of bad news in the press, the momentum is unmistakable…
As I’ll show you today, the S&P 500 has broken above a key technical indicator investors use to spot new uptrends.
If this breakout holds, history will show that the bear market ended last October. And folks who buy stocks today at discounted prices will be happy they did.
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And right now, the consensus is that there’s nothing but doom and gloom ahead for investors.
But that’s not what the market’s technical indicators are telling us.
It’s of the S&P 500. And it’s plotted against a key trend indicator called the 200-day moving average (“DMA”).
The 200-DMA is a widely watched trend indicator. It shows the average level of the S&P 500 over the past 200 days.
And on January 23, the S&P 500 made a sustained break above its 200-DMA for the first time since last March.
Traders see the 200-DMA as a “line in the sand” between a bull and a bear market.
If the S&P 500 makes a sustained break above its 200-DMA, it’s an early sign of a bullish trend change.
A great example is what happened after the dot-com bust…
The early 2000s were miserable for investors. The dot-com frenzy caused investors to push up stock prices to unsustainable levels.
In the bust that followed, the S&P 500 fell as much as 49%. But a new bullish trend took shape after it broke above its 200-DMA.
As you can see, the S&P 500 flirted with its 200-DMA twice (green arrows) during the bear market. That happened in January and March 2002.
Then it decisively moved above this line in April 2003. And a new bull market began.
To answer this, it’s worth recalling why investors were bearish in the first place.
The S&P 500 peaked in January 2022. That’s right around when the Fed started hinting that it would have to raise rates to combat spiraling inflation. And it was just two months before its first of seven rate hikes.
And as I got into more detail on here, higher rates weigh on stock market valuations.
That because it raises the amount by which Wall Street analysts discount the value of future cash flows from stocks.
But after the most aggressive pace of rate hikes in history, the Fed is now easing off.
It’s telegraphed to investors that it will raise rates by only a quarter of a point at its meeting this week. That’s smallest hike since it began tightening last March.
And we could see the end of its rate hikes altogether before long.
In December, we learned that the Consumer Price Index (“CPI”) rose 6.5% over the previous 12 months.
That’s a lot…
But it’s down from 9.1% in June – the highest reading we’ve gotten in this cycle.
And 3- and 6-month inflation rates were also way down in December versus June.
The Fed is already slowing the pace of its rate hikes. Unless we get a big surprise to the upside when the next monthly CPI reading comes out, it will soon halt them altogether. And that will take the pressure off stock market valuations.
We could still see the S&P 500 fall back below its 200-DMA, like it did after its last breakout in March 2022.
And we could still get a curveball when the government releases the CPI reading for January.
But if the S&P 500 can keep above its line in the sand… and inflation continues to slow… 2023 could end up being a very good year for the stock market.
I know that sounds crazy, given all we’ve been through… and given all the gloomy headlines.
But I hope you’ll at least stay open to the possibility that the bear market is already in the rearview mirror.
Regards,
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Chris Lowe
Editor, The Daily Cut