Everyone wants to know if we are still in a bull market. Has a bear market begun? They ask.
I have never been very good at labeling markets. To me either they are rallying or declining, and I’m just trying to play the swings. So let’s step back and summarize what we know.
We know that the speculative peak in the market was just about a year ago. That was when everyone you knew was trading, the SPACs were hot, the meme stocks and biotech stocks were happening, not to mention every software stock was ramping. How else did Nasdaq get to more than 700 new highs in early February 2021?
Then growth had a correction. In March, most of the stocks stopped going down, but it took until May for the hate of growth to become the narrative. You can see it clearly on the chart of the S&P 500 relative to Nasdaq that I have shared with you often in January. That last push up of the ratio (meaning folks shying away from the more speculative Nasdaq and into the safety of the more conservative S&P) over the blue line came in May.
But that was too extreme. Sentiment got extreme and growth stocks got too oversold. So growth stocks rallied (that’s the line heading down) but then they spent the next several months in a more balanced market. That’s because by then the market was already sifting through the speculative names, sorting them out, deciding which ones might still be okay.
Nasdaq peaked again in November, but this time with many fewer stocks participating as the number of new highs topped at around 450. Then the next shakeout in growth stocks began, and by January it was in full force. I would liken it to an earthquake. Everyone felt it this time.
Earthquakes have aftershocks as the earth starts to settle down again. That’s probably where we are now, similar to last spring, when folks started sifting through the rubble of the February 2021 decline.
As you know we’re oversold and sentiment is terrible. I will watch sentiment to see how fast it turns from the extreme bearishness we saw last week. The only inkling we have so far is the very unscientific poll I do on Twitter each week asking folks to decide on the next 100 points for the S&P 500. This week, for the first time since just before Christmas, 63% voted for up.
But the put/call ratio did not come down at all on Friday. I expect if we have some follow through on the rally front this week (my expectation is we should) we will see the 10-day moving average of the put/call ratio roll over because it is getting extreme. The equity put/call ratio’s 10-day moving average is now the highest since spring of 2020.
Each rally after sifting through the rubble tends to start generously as all stocks lift and then get much more selective as time goes on. There is no need to get complacent but at least we should see some follow through this week.