We've spent much of the first half of 2022 with folks debating whether or not we are in a bear market. Can you imagine quibbling over whether down 19% for one particular index means more or less than down 20.1%? Well if you are like me and think that is utter nonsense, then you will probably hate what is coming next.
Oh, I don't know for sure but I suspect the next debate will be if we are in a recession or not. I am no economist so I should probably not opine on this, but I did discover in recent months that the definition I had used for a recession for much of my career has been tweaked some. For much of my four decades in this business, I thought a recession was two quarters or more of negative growth. Apparently it's not so straightforward anymore.
I don't know when it changed - or maybe it never did - but I read recently that it was the media who had decided that it was two quarters of negative growth. Now since you can't believe everything you read on the internet, I'll take that with a grain - or an entire shaker - of salt. But no matter, I suspect the second half of 2022 will bring a debate on whether or not we're in a recession.
Then I suspect we'll see all these statistics about what the difference is for the market if we have a bear market with a recession or one without one. Here's what I know: when stocks start showing bases that means stocks are pricing in whatever is coming our way in terms of bad news.
What is a base? It is a series of higher lows and higher highs or at least similar lows and similar highs. And after the destruction we have seen in so many stocks in the last 18 months - yes the destruction began 18 months ago, not in 2022 - bases should be longer than two months.
Let's take a look at ARK Innovation ETF (ARKK) which I recently highlighted as a chart that did not make a lower low in June. That's great but the chart hasn't made a higher high in the last year. Not once. So unless or until it trades up over $45, this is just a possible starting point.
I know everyone wants to catch the low. It's human nature. Who doesn't want the profits (and I suppose bragging rights as well) of knowing you bought something at the low? But look at that longer term downtrend line and know that the chart is in a downtrend until that line is broken.
Then there is a chart like Zoom Video (ZM) , which a few weeks ago was on everyone's radar as a base. It's a possible base - maybe even a head and shoulders bottom, but has it made a higher high yet? It has not. And in fact since everyone flagged it, the stock has gone nowhere.
This is the problem with the situation we're in now. There are so few bases that folks are glomming onto what little there is. At a real bottom there should be hundreds of charts that have higher lows and higher highs - that have bases, not a handful.
Once again, I ask you to look at the chart of the Sentiment Cycle, not for where we are on the chart, but rather what transpired after we finally hit Panic or even Discouragement - months of back and forth and basing. That's what bottoms/bases look like.
