MARKET UPDATE FEBRUARY 2023

We are still in the middle of this messy bear market. As of Friday, February 10th, the S&P 500 is still down 14.1%, the Russell 2000 is 21.3% off its previous peak and the Nasdaq is 26.0% off its previous peak.

January was a good month for the stock market, however, as all the major indices moved higher. It is possible that the market put in a bottom in October of 2022. You can see the low points for the S&P, the Nasdaq and the Russell 2000 below. All the indices have risen between 13% and 15% since the lows in October.

Let’s look at another view of the S&P this year to see what the technical analysts are seeing. Charts like the one below show what are called price support (lower line) and price resistance (upper line) levels. You can see that the S&P has broken through the top line on the graph (resistance) which is a positive sign. This could be another signal that the bear market bottom was reached in October of 2022. But we have a long way to go.

Throughout 2022, we have been comparing this bear market with the bear market of the 1970’s. The graphs line up well as you can see below, and the seventies were the last period where we experienced high rates of inflation. The 1970’s market was only halfway through its decline at this point and continued falling for another year. It bottomed out with a price drop of 45%. This year’s market is still following the slow and steady decline we observed in the early 1970’s. You can see the recent uptick in the current 2022 line where it is beginning to separate from the 1973 line, but you can also see where that happened earlier in the 1973 cycle. That move in 1973 did not hold up, however, and the market continued to trend downward.

When we compare the current bear market to the full 1970s bear market the picture is not so optimistic. Even though recent activity has been positive for the current market, the patterns are still very similar.

We are now just about thirteen months from the pre-crash peak for the S&P and about fifteen months from the peaks of the Nasdaq and the Russell 2000. The average length of a bear market decline is eleven months, so it is possible that we are in the late stages of this crash. But we just saw that the 1970’s bear market decline lasted two years.

The reality is that no one knows if the worst is over or not for the stock market. The direction of inflation and the economy and corporate profits will likely dictate when we begin the inevitable rebound. Because of the uncertainty, it is important to follow a disciplined approach to stock market investing. Our approach to investing relies only on quantitative measures of actual price trends. We make no predictions about which way the market will head in the future. We simply react to what the market is telling us. Stay disciplined, my friends.

Happy Investing,

Phil

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