Short Term, Long Term Bear Market Digs In For Run


Simpler Trading Team

Sep 26th 2022  .  4 min read

Another rough week of trading began Monday with the stock market still feeling the after effects of U.S. central bank plans to raise interest rates and slow the economy.

The Federal Reserve (Fed) last week sent a clear message with its .75% raise in benchmark interest rates. Fed plans are to tame inflation no matter the economic damage.

This sent the stock market reeling last week with all three major indexes down for the year as of Friday, including the Dow down 18.57%, the Nasdaq down 30.53%, and the S&P 500 down 22.51%

The numbers were worse to start the week with the S&P 500 closing at 3,655.04 Monday, below its yearly low of 3,666.70 in mid-June.

Futures with Neil Yeager
Voodoo & Fibonacci with Henry Gambell

Bear stock market sets in as dollar rises

Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading, expects the downtrend to continue with the possibility of even lower levels ahead.

“Longer term, the outlook is similarly negative… we could easily see a fall to lower levels,” Mary Ellen shared in her weekly market assessment.

There are many variables in this stock market that should concern traders.

Mary Ellen pointed out that the U.S. dollar is at a 20-year high – the U.S. Dollar Index (DXY) closed just above $114 Monday – while U.S. Treasury yields rose to levels not seen in 15 years.

The DXY was formed in 1974 and measures the value – rise and fall – of the dollar relative to a collection of foreign currencies related to U.S. trade partners. History indicates that as DXY moves higher the markets go down.

Global earnings of U.S. companies are hurt with a stronger dollar, and the overall stock market is not expected to move higher until DXY starts to fall.

Economic uncertainty is translating to stock market uncertainty that is hitting sensitive stock sectors that could suffer during a recession, Mary Ellen pointed out. The U.S. economy is in a technical recession with two back-to-back negative gross domestic product quarters.

Sensitive sectors include consumer discretionary, real estate investments, and financials/banking. Commodity related stocks are also struggling due to the potential slowing of the economy as well as the rise in the dollar.

Traders will have to wait for rate hike peak

The positive outlook as the market sinks is that historically the market recovers, yet there is no definite indication of when.

“The current bear market has sent extreme pessimism into its third longest stretch and, according to data from Ned Daid Research, in the year following prior periods of similar bearishness the S&P 500 has rallied 20% on average,” Mary Ellen said.

“Other studies show similarly positive performance after a negative stretch such as FactSet’s work that highlights the period after stocks have retested prior lows later in a bear market,” Mary Ellen said. “Their study shows that when this occurred – using six bear market bouts going back to 1970 where prior lows were tested – performance has been positive over the following 12 months.”

Traders will have to watch and wait as this bear market plays its hand into the fall and through the end of the year.

In the market today, the Dow closed at 29,260.81 points to fall 1.11% (dropping 329.60 points on the day). The Nasdaq dropped to 10,802.92 points for a .60% tumble while the S&P 500 crumbled 1.03% to 3,655.04 points.

All the variable economic indicators ahead may not be able to override Fed actions, which include plans for more interest rate hikes into early next year.

Mary Ellen said market participants need to be on the lookout for more insight into the trajectory and potential peak in yields.

“Historically, once interest rates peak, it’s been a powerful catalyst for positive longer-term stock returns,” Mary Ellen said. “Near term, however, the broader markets are poised to trade lower.”