Has the Market Bottomed for 2022?

The market has been volatile for the past few days. On October 13th, the Dow Jones Industrial Average had a 1400+ point swing from low to high. There are a number of factors that typically accompany a bear market bottom and one of those factors is a sharply lower give-up day. A give-up day is exactly what it sounds like. It’s when traders have been beaten down by the market so badly and for so long that they finally say F-it, give up, and sell out of the market. The massive selling pressure from these give-up sellers is what typically causes that last significantly down day in a bear market. Markets typically do not bottom before this give-up day happens. Oddly enough, those give-up trade days are usually followed by a sharp spike in prices. Once all the sellers give up and sell, the only traders left are buyers.

Side note: Don’t get emotional in down markets. If you do, you will likely be one of the give-up traders who sells at the lows of the market!

Anyways... So is that it? Bear market over?

Maybe, but probably not quite yet. Even after the nice bounce we saw today the market is still in a 1 and 2 month downward channel. The S&P will need to get over 3,820 to break out of that channel. It is possible that this will happen with this current rally higher. However, it’s more likely that the market gives up the recent gains and re-tests the lows sometime in the next week or two. But that's not necessarily a bad thing. Markets need to retest lows in order to form a strong support level for prices. If the lows are retested, there are multiple technical indicators that tell us the path for the market is higher after that.

Our current view is that markets retest the lows sometime in the next week or two before enjoying a sharp rally higher starting in early to mid-November and lasting through most of December. We may see the S&P near the 4k range by the end of the year. We will get a CPI report and a Fed meeting in November which always have the potential to dramatically change the market direction. The 10 yr. US Treasury yield has also been relentlessly moving higher. Stocks do not like high US Treasury yields. If yields can find a way to top out sometime in early November, that will just add fuel to the sharp rally; especially for tech stocks.

What this means for 2023.

Finally, what happens after the market rallies into the end of 2022? Well, early 2023 could see some downward pressure as people take profits from the recent rally. Even if we see a rally into the year end 2022, the market will likely need to retest the lows one more time before we can leave the bear market officially behind us. That tells us that sometime in mid-2023 may be the official end to the bear market and the beginning of the next bull run.

A lot can happen between now and then. Stay tuned.

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