The news on the economy and corporate profits hasn’t been great lately, but thanks to low
expectations, it’s been good enough to push stocks nicely higher. Sentiment had gotten so
negative and major indexes so oversold that any developments on the good side of those low
expectations had the ability to push stocks higher.
Now that better news is priced into stocks with the S&P 500 price-to-earnings ratio
approaching 18, the next leg higher may be tough. That move will likely depend on the market
gaining more confidence that the inflation battle will be won, setting the economy up for a soft
landing as the Federal Reserve (Fed) slows its pace of rate hikes.
To better assess whether a new bull market has begun, we can look at some technical
analysis signals that have historically been effective in identifying major market reversals. One
is the 50% retracement level. The S&P 500 Index flirted with that level of 4,231 on August 11
but ultimately closed above it on Friday as shown in Figure 1. In all bear markets since WWII,
when the index has risen above that retracement level, it has been the start the next bull
market rather than a bear market rally which eventually fell to new lows (thanks to our friend
Sam Stovall at CFRA for this great insight).

Another technical analysis signal that may end up accurately sounding the all-clear is the
percentage of S&P 500 stocks trading above their 50-day moving averages. As shown in
Figure 2, the 90% level has historically signaled the start of new bull markets coming off of
major lows such as 2009, 2011, 2018-2019, and 2020. This indicator reached 87% on August
11, very close to that 90% trigger. While this is not a necessary condition for the end of the
bear market, it would increase our confidence that a rally back to the old highs will come
before a return to the June lows.

We can also look at some of these and other technical readings during historical early-stage
bull markets. With the help of our friend Ed Clissold at Ned Davis Research, we have included
three technical indicators, as well as the maximum levels they reached in the first 30 days of
each of the past 11 bull markets, to compare them to today’s market.
As you can see in Figure 3, the percent of stocks at new 21-day highs near 53% is well above
the average (43%) during these other young bulls.
Similarly, at over 25%, the percent of stocks at new 63-day highs is well above the 16.7%
average for these other young bulls.
Finally, we go back to the percent of stocks above their 50-day moving averages. A very
strong 83% of stocks in the Ned Davis Research multi-cap index are trading above their 50-
day moving averages, well above the young bull market average of 67.6%. The statistic shown
in Figure 2 is for the S&P 500, while this metric uses a broader market index used by Ned
Davis and offers a very similar result.
In sum, the technical conditions of this market appear ripe for the start of a new bull market
rather than a retest.

Other than the question about recessions, we often get questions asking if the market will
retest the June lows. Our answer to this question a month ago was probably yes, but now our
answer is probably no. This is not just because of the positive technical analysis
developments. It’s also about the news. The market became more comfortable with the
inflation picture—seeing prices come down—and the likely path of the Fed. Meanwhile,
earnings have been quite a bit better than many had feared.
However, there are some reasons to think a rollover and retest is possible:
• Bear market rallies: These are common and often large in size, although they are
almost always below the 50% retracement level that the S&P 500 eclipsed last week.
The 16% rally off the June 16 low is consistent with historical bear market rallies (the
maximum bear market rally weighing in at 14.5% on average). The index rallied 11%
in March 2022 before turning lower again.
• Lack of capitulation: Around the June lows, we did not quite see the levels of market
capitulation or fear normally observed at historical major market lows that would
indicate that all potential sellers have been flushed out. With some sellers still
remaining, another wave of selling after this bounce is still possible, especially as the
weak seasonal month of September is right around the corner.
• Fed policy mistake: A primary risk to markets at this point is the Fed overtightening,
which pushes the U.S. economy into recession, causing unemployment to rise and
slashing corporate profits. On the other hand, acting too slowly (or pivoting too
quickly) could allow inflation to heat up even more and for inflation expectations to
become untethered.
• Geopolitical risk: An escalating military conflict in Europe or Asia could potentially
shock markets lower by driving commodity prices sharply higher, disrupting supply
chains, and impairing consumer and business confidence (not to mention the horrible
human cost of war). Though unlikely in our view, U.S.-China tensions or a broader
European conflict certainly carry the potential to deliver a market shock that could
push stocks back to their June lows.
Following the latest rally, the risk-reward for stocks has become more balanced. Still, with
increasing odds that the June lows hold and our view that a soft landing may be as likely as
recession, we remain comfortable with our recommended overweight to equities that we

increased in early July. Stocks’ rebound past the 50% retracement level amid surging breadth
are positive signals that a new bull market may be underway.
At the same time, the lack of capitulation, still-high risk of a Fed policy mistake, and tinder box
of geopolitical tensions suggest perhaps this rally may be due for a pause or even a bit of a
retreat. But that doesn’t change our belief that stocks have more room to run through year end
and into 2023. We maintain our year-end 2022 fair value S&P 500 target range of 4,300-4,400
with upside above that range in a soft landing scenario.

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individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive
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