Investment professionals look for certain technical signals to be in place before confirming a reversal is underway. What’s key is the number of stocks participating in a move, which is why these sorts of indicators are referred to in the parlance of market technicians as “breadth thrust” signals. The duration of the move and the price gains associated with it are also important.
The indicators that most reliably confirm that there is a shift into a new bull market are:
- On the New York Stock Exchange, the NYSE American, and Nasdaq, 90% of the common stocks trade above their 10-day moving averages.
- Stocks advancing on the NYSE outpace those declining by nearly a 2-to-1 margin for at least 10 days.
- More than 55% of the stocks on the NYSE set new highs over a 20-day period.
These events only happen at bullish turns, says NDR’s Clissold. He highlights the end of the pandemic-induced bear market in March 2020, the shortest in history. That lasted 33 or 40 days, depending on whether you’re looking at the S&P 500 or the Dow Jones Industrial Average, where there were a series of powerful rallies that occurred through March and early April signaling a new upward move.
Faced with the worst first half for stocks and bonds in 50 years, the highest inflation in 40 years, and an endless barrage of bad economic data, investors might be excused for searching for bargains amid the rubble and assuming most of the damage is done.
Wall Street pros are at odds as to whether we are at an inflection point in the markets. Some see indications that we have likely hit the lows for stocks, while others warn of more pain ahead.
Representing the more bullish camp is James Paulsen, chief investment strategist at Leuthold Group in Minneapolis. He notes that the bottom may have already been made as the Fed is nearing the end of its tightening cycle, growth is slowing, and inflation is beginning to roll over. Moreover, he believes most of “the sellers are long gone.”
“Are there any nervous Nellies left?” he asks.
Taking the opposite view is David Kotok, co-founder and chief investment officer of Cumberland Advisors, a registered investment advisory firm in Sarasota, Florida, with $3.5 billion under management.
“We haven’t reached extreme levels of fear yet,” Kotok says. “We haven’t made a bottom because we haven’t seen extreme selling.” He expects interest rates will continue to go higher as inflation proves harder to subdue, geopolitical tensions worsen, and “shocks” emerge. He’s also concerned about “contagion risk” emanating from slowdowns in global economies
