“Maybe.” That’s the only fair answer to whether last week’s upside reversal – violent and rare as it was in scale and speed – will prove important as a market turning point or even matter at all. Such things are only knowable in retrospect. In the moment there literally is no answer – whether the market has turned depends on many economic developments, unforeseen bolts from the blue and crowd reactions to come. If it were a matter of purely random chance, then the U-turn from 2.4% opening drop in the S & P 500 Thursday after the disappointingly high CPI report to a 2.6% gain was probably not a decisive inflection. Bear markets have only one ultimate bottom but many interim lows along the way, after all. Friday’s enervating slide, relinquishing about a third of the entire ramp from Thursday low to Friday high, lifted the burden of proof a bit, though does leave in place some hope that the recent lows were in the buy zone for some price-sensitive bidders. If no one can confidently assert the week’s import, it’s also not crucial to make a bold call. We can at least run through what we know about this market and how market cycles tend to unfold more generally. Explaining Thursday’s mystery rebound As jarring and unexpected as the CPI whipsaw rally was Thursday, it happened at a logical moment and intuitive place. The S & P 500 into the Thursday morning low of 3491 was down 15% from before the prior CPI report a month earlier, had fallen six straight days and at 3500 had given up exactly half the monster rally from the March 2020 Covid-crash low to January’s all-time peak. Which is to say, the tape was overstretched and there was plenty of tactical focus on these price levels as a potential culmination zone for the latest downdraft. As noted here last week , 3500 is also a 27% total loss from the high – the median historical decline for recession-related bear markets, and almost exactly 15-times forward earnings. Some 40% of total trading volume was in ETFs, an unusually high proportion of top-down, tactical activity showing short-covering and a rapid grab for equity exposure by fast-money actors. That’s not to dismiss a five-percentage-point intraday swing that encompassed the prior three days’ index range as purely mechanical or meaningless noise. Such switchbacks often occur when sellers have exhausted themselves. Fewer individual S & P 500 stocks made a new 52-week low than in mid-June even as the index itself undercut the June low, a modest positive glimmer. As Bespoke Investment Group tallies it, rarely in the past three decades have up days been as rare as they have lately. The prior extreme lows on this chart were near noteworthy market lows, if not always right at them. A one-day pop to a one-week high followed by Friday’s slouch back below 3600 was likely not enough to burn up all the negative sentiment or get all the big money that’s been mispositioned for a rally onside again. Thus, the chatter among interpreters of supply-and-demand dynamics in equities that the “pain trade” probably remains to the upside in the near term, perhaps at least for another several percent. That would be a switch. October known for bottoms And — not that anyone could forget — it’s October, the month known both for searing volatility and a knack for creating bottoms. The Stock Trader’s Almanac notes that of the 23 S & P 500 bear markets since World War II, seven ended in October. And the six months starting in November of a mid-term election year have been higher every time since 1950. This could well be read as some blend of superstition, coincidence, vague seasonal rhythm and small sample size. And, for sure, the mechanical triggers of the bounce and very well-known seasonal tailwinds might make it seem more forced than organic. But the precedent is what it is, and one could easily have said the same about the gloomy September seasonal record, which was borne out this year. When the market has been down a lot three-quarters of the way through the year, the following quarter and 12 months have tended to see stocks higher – with the glaring exception of 2008 as the financial system seized up into a credit crunch and vicious recession. Similar story for buying stocks when the S & P has shed 25% — even when the market then went a good bit lower, on average the market was up a year later and even when not the damage over that period was mild. Be careful what you wish for The palliative sentiment, seasonal-pattern and long-term mean-reversion tendencies noted here highlight that the bull case is all about atmospherics. The cautious or bearish elements are the ones right in front of the market, the inputs to real-time risk appetites and valuation. In the simplest terms, it’s still a clear and persistent downtrend, rallies aren’t particularly trustworthy under such circumstances. Earnings forecasts are slipping. The S & P 500 has failed in four tries of since late August even to get above the short-term 20-day moving average, most recently on Friday. The biggest and most widely owned index stocks – the Nasdaq megaliths, except Apple – still look the weakest. Just about all inflation-report surprises in the past year have been to the upside. The 10-year Treasury nudged above 4% and Federal Reserve officials continue to suggest they believe substantial economic pain will be needed. This puts many investors in a “Be careful what you wish for” mindset, in which a near-term pause in Fed tightening is seen coming only in response to some sort of financial accident. The logic is clear, and no one knows what leaks might have sprung in the system (UK pensions and bond market, collapsing Japanese yen). But I’m willing to suggest that the hunt for “black swans,” in itself, reflects scarring from the 2008 global financial crisis as much as it does a calculated assessment of clear and present dangers. Back in 2008, after all, every investor and observer wasn’t out there saying, “Watch out for a rerun of 2008” as they are now. Is forewarned forearmed? How much is left to the selloff? Circumstance suggests being more circumspect than usual in handicapping how much is left of this retrenchment period for the markets and economy. This cycle has been idiosyncratic or even unprecedented on the way up and down. We’d never before had a flash recession short-circuited by massive, timely fiscal and monetary response or recovered a 35% stock-market drop as quickly as we did 2020. If a recession is coming but doesn’t strike until 2023, it would seem the market peaked “too early” in January based on normal historical lead times, and a market low now would seem “too soon” based on the pattern of stocks hitting a low during rather than before a recession. A multi-decade downtrend in bond yields was busted. The Fed has dusted off a 40-year-old inflation war plan. We’ve lived with rates at these levels not too long ago, sure, and economies and markets can adapt. But rates never got here from zero or rose this fast before (mortgage rates from 3% to 7% in six months). It’s plausible to argue that much, if not all, of the needed reset in valuations, expectations and risk profiles has been done. That big, important stocks such as JP Morgan , Nike and Walt Disney are down on a three-year basis and have been relieved of whatever pandemic-stimulus fluff they once held. That markets always bottom before the economy turns and the indexes don’t tend to spend all that much time at the ultimate lows, wherever they lie. All valid points. I’ve made them a few times lately. No one quite knows when they will matter.
