There are several headlines in the business media on Friday morning stating that the S&P 500 has entered into a new bull market. This is because the S&P 500 has moved up more than 20% from the low it hit in October 2022. It is unclear where this 20% definition comes from, and it isn't very logical, but it makes for a nice, attention-grabbing headline.
Unfortunately, if you are a trader or investor, it is probably more misleading than illuminating. A bounce of 20% in individual stocks or indexes is quite common and doesn't necessarily presage a major change in trend. A good example is the Russell 2000. The Russell hit a low in October 2022 and bounced more than 20% at the end of January 2023. I don't recall seeing any blaring headlines about a new bull market in small-cap stocks at the time, but it turned out that the 20% move would have been a good time to sell. The Russell fell substantially in March and still has not returned to the "bull market" levels it hit in February.
If an index falls from 1,000 to 500 and then bounces back to 600, that would meet this media-created definition of a new bull market, but no one would be using that terminology because it is so illogical.
The point here is that a 20% move may be nothing more than just normal volatility. While it definitely is possible that the recent trend in the various indexes will continue, there isn't any statistical basis for that belief.
Ironically, this desire to proclaim that there is now a new bull market makes it less likely that it will hold. In the short term, talking about a bull market may create some fear of missing out and short squeezes, but once there is a consensus view of a bull market, then the buying power starts to wane; there is no wall of worry to climb when things look rosy.
This sort of contrary thinking is difficult to time with any precision, but headlines about a new bull market based on an arbitrary definition should be a warning rather than a celebration.
I don't want to sound overall negative. There has been a nice improvement in the price action in the broad market. The action is still quite narrow, and the gulf of performance between big-cap technology and everything else is huge, but there is a shift in the smaller stocks, which has the potential to go further. We will need to stay focused on the price action, but there is positive momentum out there and it is making for improved stock picking.
We have a mixed start on tap here on Friday morning as Tesla TSLA helps the Nasdaq 100 again but big-cap technology takes another rest.
