2022 Bear market bottom part 2
In part 2 of the market bottom series, let’s take a look at why this 2022 bear market bottom has been set ( June 18 and the subsequent accumulation base in 1st half of July 2022 )
I will lay out the following 4 reasons why the market bottom has been set,
1) Capitulation ( spike in volume )
<S&P 500 , 10-year yield chart >
candlestick movement into the bottom ( large solid candlestick & gap down )
volume compared to recent period ( spike higher )
looking at US bond 10-year yield chart, if smart money in bond market think inflation will continue to be a problem , don’t you think they would have sold bond ( sell bond = price lower, causing 10-year yield to go higher, it’s an inverse relationship. But we don’t see the 10-year yield chart going higher, meaning market do not sell-off bond and don’t think inflation is an issue going forward ( In fact, inflation will roll over by 2022 year end )
2) Rotation into aggressive areas of the market
<S&P 500 , QQQ/XLY vs Spy >
By looking at the ETF ratio & relative performance (QQQ/SPY, XLY/SPY, Growth/Value ), we can glean some insight into the Rotation of Wall street smart money. While the market is making new and final low in mid June 2022 , what is performance of the aggressive area ( Tech and consumer discretionary sector, Growth ETF ) ?
Technology vs overall market (QQQ/SPY )
Technology was bearing the brunt of bear market, falling much more than the broader market in Jan to May, until subtle changes in mid June.
As denoted in the blue dotted vertical line area, when S&P 500 was making lower low in mid June (compared to mid May), Technology sector ( QQQ ) was performing slight better compared to SPY ETF, therefore we saw a higher high in QQQ/SPY ratio in mid June compared to mid May.
Discretionary vs overall market/Staples (XLY/SPY, XLY/XLP)
In Dec 2021 to May 2022, discretionary ( things we want , car, restaurant, travel, household durables/renovation.. ) vs Staples ( things we need, cleaning product, breakfast cereal, drinks, can food, etc ). Same picture, discretionary stock is performing better than overall market & staples stock.
< S&P 500, growth vs value >
Growth vs Value ( across large, mid & small cap )
Growth name was getting punished severely in the 1st half of 2022 because of rising inflation. There was a lot of fear in the market that a steeper rise interest rate ( higher discount rate ) will be required to fight the high inflation, which will lower valuation & future earning potential of growth stock. Indeed this was the case from Jan to May 2022. ( If you look at small and mid cap, growth was underperforming value from Oct 2021 till May 2022 ) But looking at June low, wall street smart money was silently rotating into growth area ( hence the better growth performance relative to value )
3) Accumulation Base
<S&P 500 base building>
<NDX base building>
Market began building a base after it hit the bottom in mid June, the accumulation base started in mid June and ends in mid July, when the candle stick broke out of the S&P500 +/- 3920 & Nasdaq +/-12100 resistance level, there was growing confidence of a upward, and off it goes till now ( dated 18 Aug 2022 )
(Disproved) Bear flag formation hypothesis
<S&P 500 Bear flag formation – which was disproved>
Just a side note, in mid July 2022, looking at the chart above, there were several competing narratives, one of the famous one is bear flag formation, I’ll admit I gave it a serious thought, because I had a bias that market need another leg lower to washout the weakhand and make them capitulate. However, I was also seeing a possible base forming, because market had 2 to 3 chances to go lower but it didn’t, therefore I enter some small position in Nasdaq with stop loss just below the flag/base bottom (11250). And since then, market rally to the shock of many participant& they have been cursing and swearing at this rally. Market normally travel the path of most pain, market does what everyone least expects it, because last few remaining sellers have sold, and there are (really) few buyers getting in initially ( except for the few really smart money )
4) Weekly candlestick close above 50% Fibonacci retracement of the entire downtrend.
<S&P 500 weekly close above 50% retracement of the downtrend >
Final and most important reason, going back to previous 90 years market history, everytime market rally and have a weekly candlestick/OHLC close above 50% retracement of the entire downturn, it never makes a lower low. After weekly close above 50% fib, it could have retrace below 50% some of the time, but most of the time it is not too big.
Listing out all the previous 90 years bear market historical studies are far too long for this articles ( I will post an article in the future if I have time.
In the upcoming part 3 & 4, I will share the following,
1) Outlook in September, market possible path going forward and upcoming retracement ( shallow or deep retracement before going higher, or continue to grind/pop higher with shallow retracement => bigger retracement=> continue higher )
2) How to identify trend change and several market entry technique to get in the trend earlier after signs of market trend change.
Disclaimer : The information presented here are for research and education purpose only, and does not constitute investment advice, trading recommendation, author shall not liable for any action taken by any individual/company with regards to the information presented here or any part of the website - https://marketcycleedge.substack.com/