The S&P 500, one of the most closely watched stock market indices, recently closed above a significant threshold, signaling its exit from the longest bear market since 1948. Let's delve into key statistics and explore the current state of the stock market, examining signals of recovery and popular investor strategies.
The S&P 500's Bear Market Journey
The S&P 500 spent 248 trading days in bear-market territory, surpassing the previous record of 484 trading days set in 1948. On average, bear markets last around 142 trading days, making this recent one an extended downturn. During this period, the index fell 25.43% from its recent high to its bear-market low, showcasing the magnitude of the decline. Despite the recent exit from the bear market, the index remains 10.5% below its record close of 4796.56, set on January 3, 2022.
Market Signals and Recent Developments
According to market data, a 20% rise from a recent low indicates the start of a bull market, while a 20% fall indicates the start of a bear market. However, the market does not switch between these states each time it crosses the threshold; a 10% or 20% move in the opposite direction is required to change its status. It is noteworthy that, of the 14 bear markets since World War II, only two resulted in quick returns to a bear market.
Recent developments, including a rise in first-time jobless claims, have reinforced expectations that the Federal Reserve will maintain interest rates at their current levels. This positive sentiment has contributed to the recent boost in stock prices.
Signs of Recovery: Bull Market or False Breakout?
The S&P 500, along with the Nasdaq Composite and the Dow Jones Industrial Average, has shown signs of recovery. The S&P 500 closed at its highest level since August 16, 2022 while the Nasdaq exited its bear market on May 8, 2022 and the Dow on November 30, 2022. However, it is essential to examine the sustainability of this recovery.
While the breakout above 4200 is confirmed, there has been limited progress since then. Typically, a breakout pulls back to the breakout level before resuming an upward trend. A potential false breakout is a concern, similar to previous instances in 2022. If the index pulls back below 4150, it could indicate a false breakout and warrant caution.
Promising Indicators and Investor Strategies
Several indicators suggest positive prospects for the stock market. Realized volatility is decreasing, and the "modified Bollinger Bands" are tightening, indicating a potential bullish trend. Equity-only put-call ratios are falling, supporting their buy signals. Breadth, measured by the number of advancing versus declining stocks, has confirmed the upside breakout. New Highs vs. New Lows has also shown positive signals.
Additionally, the VIX (CBOE Volatility Index) has dropped to its lowest levels since January 2020, indicating a decrease in market volatility. This trend has revitalized the "buying the dip" strategy, which involves purchasing stocks the day after a market decline. In 2023, this strategy delivered strong gains, with average one-day returns for the S&P 500 reaching nearly 0.3%, its highest since 2020.
Buying the Dip: A Strategy Regains Popularity in 2023
Buying the dip, a favored strategy among short-term traders following the 2008 financial crisis, is experiencing a resurgence in 2023. After yielding losses in 2022, this strategy is on track for its third-best average return ever for a calendar year. Megacap technology stocks and semiconductor names, driven by the AI boom, have contributed to the market's recent gains. Notably, Nvidia Corp. has seen a significant increase of 164.6% this year.
Investors' eagerness to buy the dip has been fueled by factors such as a narrative of an accommodative Federal Reserve, receding inflation concerns, a postponed recession, and successful debt ceiling extensions. The strategy has regained popularity as the stock market shows signs of recovery and investors find favorable opportunities.
Bottom Line
The S&P 500's emergence from the longest bear market since 1948 offers hope for investors. While caution is warranted due to the possibility of a false breakout, several indicators and strategies suggest a positive outlook. With decreasing volatility, promising market signals, and the revival of the buying the dip strategy, investors are finding opportunities in the recovering stock market of 2023.
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