In December, the stock market suffered immensely with the bear market but, just as it appeared that Christmas had been canceled on Wall Street this year, markets surged sharply yesterday.
Is this the start of a long-overdue Wall Street Santa rally?
According to our recent research, it could be the start of something far bigger…
If you listen to the news, you’d believe that equities are in complete disarray right now.
That, however, is not the case. The S&P 500 is currently trading at 3,800. In both June and September, it was approximately 3,600.
In other words, despite the fact that the stock market has swung sharply higher and lower during the last six months, it has finally gone nowhere.
We’ve returned to where we were six months ago.
That is remarkable for a bear market.
Bear market declines do not occur all at once. They take “intermissions.” However, the “breaks” are usually quite brief and they usually never live more than six months.
When they survive that long, it usually means that the bear market is nearing its end.
Let’s put this into numbers.
The Bear Market Nearing the End
The six-month moving average captures the S&P 500‘s medium-term price trend.
That moving average has been decreasing all year because stocks have been declining.
However, the six-month moving average flipped higher in December for the first time in this bear market.
The current average is 3907. This is 0.2% greater than it was in November.
You may be saying: Well, why does that matter?
Because this type of price movement has historically been associated with the end of bear markets.
During the 2008 financial crisis, the market’s six-month moving average shifted higher for the first time in May 2009.
Over the next year, stocks increased by 19%.
During the early 1990s recession, the market’s six-month moving average switched higher for the first time in February 1991.
Over the next year, stocks increased by 12%.
The market’s six-month moving average flipped higher for the first time after Black Monday in April 1988.
Over the next year, stocks increased by 19%.
This list of examples is endless. Since 1950, the market’s six-month moving average rising has reliably signaled the conclusion of bear periods and the start of new bull markets.
What are the average returns a year after this phenomenon occurs? About 20%!
Exemptions from the Rule
Over the last 70 years, there have only been two significant exceptions when a bear market did not terminate when the six-month moving average flipped higher.
The most recent exception occurred in March 2002.
The bear market did not end then because equities were too pricey.
In March 2002, the S&P 500 was still priced at 21.7 times projected earnings. That is around 25% more than the S&P 500’s current forward earnings multiple.
The only other instance occurred in October 1973. That bear market did not end then because inflation was escalating in a very concerning manner.
In October 1973, inflation was over 7%. It was higher than 12% a year later.
Today, however, inflation is steadily dropping, with almost everyone expecting it to fall to 3% by 2023.
In other words, the stock market accomplished something this month that has virtually invariably marked the end of bear markets in the past. Its six-month moving average increased.
Furthermore, the only two outliers to this trend have no relevance now. Stocks were far more costly in one, and disinflation had yet to take hold in the other.
The Final Word on the Bear Market’s End
The data presented here is quite convincing. It definitely predicts that the bear market of 2022 is nearing its end and that a new bull market will emerge in 2023.
Many investors will be taken aback by the appearance of this new bull market.
But foresighted investors who see it coming and position themselves to capitalize on it now could make modest fortunes in 2023, while everyone else is scrambling to catch up.
Will you be one of the investors who have to play catch-up? Or are you one of those who’ll make new fortunes?
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