Although much of the market has been in a miserable bear market for many months, the S&P 500 and Dow Jones have been holding up very well and covering up the carnage that has been going on under the surface. Finally, on Friday, the S&P 500 dropped more than 20% from its highs, and financial media started rolling headlines about the bear market.
While a technical bear market for the S&P 500 is based on a random mathematical calculation, it does have an important psychological impact. I don't think that it is possible for the markets to form a solid low until there is an official bear market in the S&P 500
Unfortunately, the S&P 500 bear market only lasted a few hours. Stocks blasted higher in the close, and the S&P 500 finished with a small gain. The late-day action was likely triggered by a combination of option expiry and buy programs.
While it is possible that the action on Friday is an important turning point, it would be the shortest bear market in history for the S&P500. I suspect we will see continued volatility next week and a revisit of bear market territory.
On the bright side is that while the indices and big caps performed very poorly this week, there was some interesting relative strength in small caps, secondary stocks, and many groups that have lagged for a long time.
One of the most interesting stats is that there were around 1,000 stocks hitting new lows as the S&P 500 and Doe hit new lows. Last week there were over 3,000 stocks hitting new lows. Much of the market has already seen liquidation and capitulation, and those stocks held up this week while the indexes were sinking.
This entire bear market has been unusual as it has progressed on an incremental basis. It started with speculative stocks back in February 2021 and didn't start hitting big caps and indexes until recently. It is very likely that the recovery will be incremental and uncorrelated as well.
There is some improvement in the charts of many smaller stocks, which is making me increasingly bullish, but the S&P 500 situation makes me think there is more pain to come for the indexes and big caps.
Have a great weekend. I'll see you on Monday.
