Asking if this is a new bull market or bear market bounce might be the wrong question
The S & P 500 is more than 17% off its June 16th bottom, and market internals look very strong. Over the weekend, Fidelity Investments’ Jurrien Timmer noted that 88% of stocks in the S & P 500 are above their 50-day moving average. Perhaps more importantly, the S & P has retraced 50% of its losses from the January 3rd high to the June 16th low. Based on that retracement, Timmer concludes, “If this rally continues much further than it has so far, on a historical basis it will be hard to conclude that this is not a new bull market.” Sam Stovall at CFRA Research agrees. “History reminds us that the S & P 500 never set a lower low in any post WWII bear market after recovering 50% of that peak-to trough decline…history says the low is already in.” But even if it is a bull market, it’s still pricey. The S & P 500 is already trading at over 18x forward earnings, up from about 16 a couple months ago, which is expensive by historic standards. The S & P has been rising purely on the basis of an expanded P/E multiple: earnings for 2022 and 2023 are both slightly lower than when the third quarter started. When you are getting near a 20 multiple, you would traditionally make some kind of argument about an improving economy and potentially higher earnings, both of which are tough to make in this very choppy environment. But bulls argue that peaking inflation and the Fed pivot means there is less earnings risk, and that should allow for a higher valuation. If you think stocks are pricey, they could get even pricier. We could get the opposite of what everyone thought was going to happen in August and September. We could get a meltup. How? Remember, a lot of traders pulled out in May and June and have been on the sidelines. With the market rallying, “the whole Street is caught offsides,” one trader told me. Some of the most shorted stocks, including meme stocks like Gamestop, have been rallying more than the market, which is a warning sign of a meltup. As we go higher, it will force more investors who are now on the sideline into the market, which can easily push stocks into overbought territory. Which gets back to the point: even bulls are getting nervous as the market advances. “If the rally continues, I will have to respect the technical history of bear market rallies not exceeding a 50% retracement, and conclude that a new cyclical bull market is underway,” said Timmer, the director of Fidelity’s global macro. “But given the earnings and valuation backdrop, even if the bottom is in, it’s not easy (for me) to draw a compelling bullish narrative here. It seems like the best hope for equities is that earnings keep growing at mid-single digits, while valuations remain at current levels.”
The S&P 500 is more than 17% off its June 16th bottom, and market internals look very strong. Over the weekend, Fidelity Investments’ Jurrien Timmer noted that 88% of stocks in the S&P 500 are above their 50-day moving average. Perhaps more importantly, the S&P has retraced 50% of its losses from the January 3rd high to the June 16th low.
Based on that retracement, Timmer concludes, “If this rally continues much further than it has so far, on a historical basis it will be hard to conclude that this is not a new bull market.”
Sam Stovall at CFRA Research agrees. “History reminds us that the S&P 500 never set a lower low in any post WWII bear market after recovering 50% of that peak-to trough decline…history says the low is already in.”
But even if it is a bull market, it’s still pricey. The S&P 500 is already trading at over 18x forward earnings, up from about 16 a couple months ago, which is expensive by historic standards. The S&P has been rising purely on the basis of an expanded P/E multiple: earnings for 2022 and 2023 are both slightly lower than when the third quarter started.
When you are getting near a 20 multiple, you would traditionally make some kind of argument about an improving economy and potentially higher earnings, both of which are tough to make in this very choppy environment.
But bulls argue that peaking inflation and the Fed pivot means there is less earnings risk, and that should allow for a higher valuation.
If you think stocks are pricey, they could get even pricier. We could get the opposite of what everyone thought was going to happen in August and September. We could get a meltup.
How? Remember, a lot of traders pulled out in May and June and have been on the sidelines. With the market rallying, “the whole Street is caught offsides,” one trader told me. Some of the most shorted stocks, including meme stocks like Gamestop, have been rallying more than the market, which is a warning sign of a meltup. As we go higher, it will force more investors who are now on the sideline into the market, which can easily push stocks into overbought territory.
Which gets back to the point: even bulls are getting nervous as the market advances.
“If the rally continues, I will have to respect the technical history of bear market rallies not exceeding a 50% retracement, and conclude that a new cyclical bull market is underway,” said Timmer, the director of Fidelity’s global macro. “But given the earnings and valuation backdrop, even if the bottom is in, it’s not easy (for me) to draw a compelling bullish narrative here. It seems like the best hope for equities is that earnings keep growing at mid-single digits, while valuations remain at current levels.”