Transcript:
Easan Arulanantham:
What is a bear market rally? And how do you tell the difference between a bear market rally and just a regular rally?
Tom Vaughan:
Yeah, we got this question earlier. So I’ve got some things prepared for this too. But it’s really fascinating because, first of all, some definitions, right? A bear market is a down market. Theoretically, it is down 20% or more, right. But people use it all the time for just down market. So it kind of depends on who’s saying it. Right now we’re over 20%, we’re technically in a bear market. So down, bull is up, right. And so what happens is then the major trend and the minor trend, that’s how I look at it, major trend is down, minor trend are these little pops back up and coming back down? Right. So I’ll show you an example here. Here’s that here’s a chart of the S&P 500, as denoted by, you know, the spy ETF, I put some little yellow lines in there for some of the little rallies we’ve had. So obviously, the overall downturn is the bear market is the major trend is down. And matter of fact, one of the indications for that is number one being below the 200 day moving average, and number two, having the 200 day moving average coming down to me, that denotes a downward market. Okay. And, and so these little rallies or have been bear market rallies, right? Because they’re they haven’t turned into a full recovery. They’ve all failed, right, and market has gotten lower after those rallies, you know, there’s four big ones, including the one we’re in right now. Now, one of the fascinating things about this, one of these bear market rallies will be the one that gets us all the way back right to the top. And it’s very, very difficult to tell which one it is.
I remember in the 2008 downturn, when the market bottomed out March of 2009, it was a very dark period, you know, economically, things were really bad. And the market bottomed out in the middle of that that’s normal. And you so you really have to watch for certain things. Number one, is, in my opinion, like like fighting through resistance. So here we go, we have this green blob on the side here, which is a volume profile, the longer that bar is it means more shares traded at that price. And so the markets already fallen through that yellow line is now trying to fight back through it. And it’s going to be difficult because a lot of people bought at that price, and it fell, and they want their money back when it gets there, right. So that’s why it’s resistance. And so in in our true recovery, and not just a bear market bounce or bear market, in a rally, you’ll see the market fight through multiple levels of resistance. And so that would be something to watch for, does it make it through this one, one of the other things that I would watch for is some volume, at least eventually, right? If the volume stays down during the up portion, it’s just not enough energy and power to kind of get things going. As far as that goes. So we’re not seeing that yet. It is a four day week. So maybe that’s the culprit. So let’s see what happens next week.
Next week, having it fight through this resistance having volume picked up, that’d be a good sign. I mean, it really would be that things are moving in the right direction. And so because the next you know, resistance level is up here. So you again, you break that first resistance level, you get into that second resistance level, you could really, you know, see a recovery. So bear market rally is just a rally that kind of fails in a downturn, an upward rally that fails in a big downturn and ends up at a lower low, right. And a recovery is when that finally turns around. True recovery gets all the way back up to a new high. Right, which, if you look back there was in January 2 trading day of the year. And so anyway, that’s, that’s, that’s what it is. That’s how it works. And that’s how to watch for recovery. Right now, as we said, I don’t see it right, personally, but you know, we’re all data dependent. We all have to wait and see kind of what happens, what transpires and you know, react to that to a large degree. I mean, we can guess here, oh, it’s gonna go lower, it’s gonna go higher or what have you, but it’s better to have kind of some historical data. So you can look at and look at what’s happening right now and have some comparison.
Easan Arulanantham:
So do you think, you know if we had some good economic data next week, could push the market to kind of break that resistance and how to continue the run?
Tom Vaughan:
Yeah, it could. I think I think the biggest issue I don’t think there’s much happening next week from the Fed, you know, the inflation number when we get when we get those. And then the wording from the Fed. I mean, they just keep coming out. And I mean, even just as last week, we had interviews and testimony, the word recession was mentioned, the most I’ve seen so far this year, but by Fed governors or by Chairman Powell himself as a possibility, talking about how difficult it will be to, you know, bring down inflation because of the outside influences. So that, you know, that’s the problem, that I would love to see some of that change, because we’ve had these rallies. If you go back and look at these tops that we’ve had in these bear market rallies, most of them have been extinguished. by either the Fed themselves what they’ve done, that was a surprise what they’ve said, or inflation numbers coming out, that’s making the Fed Do you know, things that are more surprising, like doing a three quarter point increase instead of a half, because of the CPI number that came out, you know, a couple of Fridays ago, right? So it’s, it’s, but I’ll tell you what, that’s how the market works.
I mean, you can make all the arguments you want, it can climb a wall worry, it can come all the way back, and most recoveries, and I call it the anatomy of a recovery, it starts with the market overextending to the downside, which you definitely see in that chart, that’s a cascade a waterfall that happened. And it kind of gets all the sellers out at brings in some buyers, right, the only ones left doesn’t take that many in volume can be low, and boom, boom, you get this motion up. And then pretty soon, all the hedge funds that are shorting the market to death, because the market is going to fall farther, they have to start covering those shorts, that becomes buys, right. And if the cover the by the by the market keeps going. So sometimes short covering is in short, covering short positions right now, according to articles I’ve read are as high as they’ve been since 2008. So very high. And so then then you start to get this kind of fear of missing out right and FOMO, and people just start pouring in. And then eventually the institutional money has to come in to really make it go volume is picking up and you get the scenario where, you know, they can’t miss out, right?
I compare myself to the Vanguard Total Stock Market Index, for example. And so you know, if I have lots of cash, which I do right now, and lots of ultra short term bonds, which I do right now, I’m gonna lose to this thing, if it takes off. And eventually at some point, I have to get back in and that money will dump back in with everybody else. That’s that’s a recovery. That’s how it works. But what we’ve seen so far, just in my opinion, is that when we get these big runs, the institutions aren’t coming in, we’re not seeing the big volumes on the upside. I think, you know, they’re very, very attuned to the Fed, and the Fed and they don’t want to fight the Fed. That’s a very common saying and, and they don’t want to be, you know, on the other side of Fed is hammering and hammering and hammering. They want to wait until that point when the Fed starts to at least, you know, get a little bit softer, or at least they can see that it will happen. Right. At some point a futures market does look forward. It’s hard to look real far forward right now what’s happening, but that’s, that’s that’s it’s definitely possible. This could be we could have set the bottom last week. Yep. You know, so we’ll see. So that’s, that’s a good question.