As always in such situations, our real friends are not the financial pundits or the financial press but the raw numbers. So, ignoring the news for the moment, what do the numbers tell us? As the most traded index in the world, let’s look at the S&P 500. There are many free financial charts on the internet but if you don’t yet have a favorite then Yahoo Finance has a wide range of charts with the most popular indicators.
When Does a Bear Market End?
Surprisingly, for such widely-quoted terms there are no absolute definitions of what a bear and bull market really are. The closest we get to a practical definition is that a bear market is a drop of over 20% from the most recent high, and conversely, a bull market is a 20% rise from the most recent low. Note that these are relative terms and that the start of the next genuine bull market will still be below the October 2007 highs. Note also that such swings need to be consolidated for the new trend to be established. It is not enough for a market to rise 20% only to then fall back 10%.
This latter point is important for investors, as opposed to market traders who thrive on getting in and out of the markets to turn a profit quickly. On 9 March the S&P 500 closed at a recent low of 676. As of writing it is around 830, an increase of some 154 points or over 22%. But is this a much-feared bear market rally or the start of a genuine bull run? Let’s see what the charts tell us.
A Simple Indicator for Investors
In contrast to the above definitions for a bull and bear market, the best and simplest indicator of the long-term market trend is the 200-day simple moving average (or 200-SMA). This is a simple average of the previous 200 trading days so covers data from over 40 weeks. The 200-SMA for the S&P 500 is currently at 1,019, some 200 points above the index itself and a strong indicator that, as we all know, we are in a deep bear market. The last time this 200-SMA resistance level was tested was back in May 2008 and it has been seriously downhill since then. A genuine and long-lasting bull market will only happen once this 200-SMA has been breached and the stock market index sits comfortably above it. Using this measure, we are not yet ready to call a new bull market.
However, every investor would love to buy in at the bottom rather than wait for an unambiguous market signal. A shorter-term, but still widely used, moving average is the 50-day (or 50-SMA). Looking at the S&P 500 chart with both the 200-SMA and 50-SMA showing we can appreciate why the current level is an important pivot point. The market is now above the 50-SMA which is at 792, signalling a rising market, but with only about 40 points of breathing space. Charts cannot predict the future but they can illustrate trends and trend reversals.
How To Tell If This Is A Bear Market Rally
The important point here is that the markets will likely test this rally by dropping back to the 50-SMA. If that support level holds then it may be a good idea to buy into this rally. Note that exactly the same thing happened back at the start of this year. The market rose above the 50-SMA for a couple of weeks only to then fall below it again. Waiting for that bounce off the new support level is wiser than buying now at what could well be the end of a bear market rally.
If you bought into this rally from the start of March then you can congratulate yourself, but still keep an eye on that same chart as a break below the 50-SMA would signal the end of this rally and a time to cash in profits. If you have held off making any new investments, then best to wait for the same 50-SMA to be tested. The 200-SMA is still a long way away from current stock market levels so that a real bull market is not yet in the air.