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If history teaches us anything about Wall Street, it’s to expect the unexpected. For example, the prevailing mindset into 2023 was that:
· “Higher interest rates are good for banks.” If banks are managed properly, this notion can be true. When rates rise, banks can take advantage of the spread between the interest that banks pay to customers and the interest the bank can earn by investing. However, rising interest rates are not always positive – especially when they rise as fast as they have recently. This cycle, Silicon Valley Bank () set off a firestorm by making ill-advised bond bets that would benefit if rates stayed near rock bottom lows and suffer if they didn’t. Ultimately the bond bets, coupled with an increase in withdrawals, led to the bank’s demise and set off a domino effect in the industry.
· Crypto is dead: As if the crash of Bitcoin from nearly $70,000 to under $20,000 wasn’t enough, the recent “crypto winter” led to a snowballing effect and ice-cold sentiment into the new year. In 2022, several exchanges, tokens, and brokers blew up – ultimately culminating in the demise of one of the largest crypto exchanges, FTX. However, to the surprise of many, Bitcoin has shown incredible resilience, even in the face of the current macroeconomic climate. Fast forward to today, and Bitcoin is up nearly 70% year-to-date.
The Madness of Crowds
Is the crowd on the wrong side of the trade again? The notion that higher interest rates are favorable for banks and crypto being dead are two recent instances of “the crowd” being on the wrong side of a trade. Now, according to the AAII (American Association of Individual Investors) Survey, bullish sentiment is at a 6-month low while bearish sentiment is at a 4-month high. In other words, most investors believe that markets are ready to fall. Below are 7 signs we may be in a bull market:
1. Higher highs & higher lows: Higher highs and higher lows is the first step to having an uptrend. Currently, the tech-heavy Nasdaq 100 ETF ((QQQ - Free Report) ) is achieving this.
Image Source: Zacks Investment Research
However, the iShares Russell 200 ETF (IWM - Free Report) ), which tracks small caps and has been dragged down by banks and energy stocks, is having difficulty creating higher lows.
Image Source: Zacks Investment Research
2. A More “Accommodative” Federal Reserve: The Federal Reserve, which controls interest rates, has a significant impact on liquidity and thus, market direction. In an effort to tamp down inflation, the Fed has been raising interest rates rapidly. That said, the recent banking crisis may force a “pivot” or at least a slowdown of rate hikes. As the old Wall Street saying goes, “don’t fight the fed!”
3. Stocks are Climbing the “Wall of Worry”: If all the news is rosy and everyone is on the same side of the boat, it is difficult for stocks to move higher. At the moment, investors have plenty to worry about, including the War in Ukraine, rampant inflation, and the banking crisis. With that said, investors should put less emphasis on the news and more emphasis on the reaction to the news. The market reaction to the news is more telling than the news itself.
4. Weak Opens, Strong Closes: In bear markets, stocks tend to open strong and close weak. Conversely, in bull markets, stocks tend to open weak and close strong.
5. Strong Breadth: Breadth measures the number of stocks participating in a move. More participation generally leads to a more robust market uptrend.
6. Bullish Golden Cross: A “Golden Cross” occurs when the shorter-term 50-day moving average crosses above the longer-term 200-day moving average. This bullish phenomenon signals an intermediate trend change.
Image Source: Zacks Investment Research
7. Seasonality: Seasonality trends can play a key role in how the market behaves. Pre-presidential election years, like the one we are in now, tend to provide the largest gains on average.
Takeaway
Despite the negative news, sentiment, and recent volatility, stocks are taking steps toward entering a classic bull market. However, nothing is certain just yet. In order to provide more solid evidence, small-cap stocks will need to begin to participate in a larger way, and the ailing banking sector will need to stabilize. Bulls want to see continued strength in growth-tech and stabilization in names such as Bank of America (BAC - Free Report) ). As of now, the market is being carried by mega-cap tech stocks such as Apple (AAPL - Free Report) ),Microsoft (MSFT - Free Report) ), and Nvidia (NVDA - Free Report) ).
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7 Signs of Bull Market Behavior
Expect the Unexpected
If history teaches us anything about Wall Street, it’s to expect the unexpected. For example, the prevailing mindset into 2023 was that:
· “Higher interest rates are good for banks.” If banks are managed properly, this notion can be true. When rates rise, banks can take advantage of the spread between the interest that banks pay to customers and the interest the bank can earn by investing. However, rising interest rates are not always positive – especially when they rise as fast as they have recently. This cycle, Silicon Valley Bank () set off a firestorm by making ill-advised bond bets that would benefit if rates stayed near rock bottom lows and suffer if they didn’t. Ultimately the bond bets, coupled with an increase in withdrawals, led to the bank’s demise and set off a domino effect in the industry.
· Crypto is dead: As if the crash of Bitcoin from nearly $70,000 to under $20,000 wasn’t enough, the recent “crypto winter” led to a snowballing effect and ice-cold sentiment into the new year. In 2022, several exchanges, tokens, and brokers blew up – ultimately culminating in the demise of one of the largest crypto exchanges, FTX. However, to the surprise of many, Bitcoin has shown incredible resilience, even in the face of the current macroeconomic climate. Fast forward to today, and Bitcoin is up nearly 70% year-to-date.
The Madness of Crowds
Is the crowd on the wrong side of the trade again? The notion that higher interest rates are favorable for banks and crypto being dead are two recent instances of “the crowd” being on the wrong side of a trade. Now, according to the AAII (American Association of Individual Investors) Survey, bullish sentiment is at a 6-month low while bearish sentiment is at a 4-month high. In other words, most investors believe that markets are ready to fall. Below are 7 signs we may be in a bull market:
1. Higher highs & higher lows: Higher highs and higher lows is the first step to having an uptrend. Currently, the tech-heavy Nasdaq 100 ETF ((QQQ - Free Report) ) is achieving this.
Image Source: Zacks Investment Research
However, the iShares Russell 200 ETF (IWM - Free Report) ), which tracks small caps and has been dragged down by banks and energy stocks, is having difficulty creating higher lows.
Image Source: Zacks Investment Research
2. A More “Accommodative” Federal Reserve: The Federal Reserve, which controls interest rates, has a significant impact on liquidity and thus, market direction. In an effort to tamp down inflation, the Fed has been raising interest rates rapidly. That said, the recent banking crisis may force a “pivot” or at least a slowdown of rate hikes. As the old Wall Street saying goes, “don’t fight the fed!”
3. Stocks are Climbing the “Wall of Worry”: If all the news is rosy and everyone is on the same side of the boat, it is difficult for stocks to move higher. At the moment, investors have plenty to worry about, including the War in Ukraine, rampant inflation, and the banking crisis. With that said, investors should put less emphasis on the news and more emphasis on the reaction to the news. The market reaction to the news is more telling than the news itself.
4. Weak Opens, Strong Closes: In bear markets, stocks tend to open strong and close weak. Conversely, in bull markets, stocks tend to open weak and close strong.
5. Strong Breadth: Breadth measures the number of stocks participating in a move. More participation generally leads to a more robust market uptrend.
6. Bullish Golden Cross: A “Golden Cross” occurs when the shorter-term 50-day moving average crosses above the longer-term 200-day moving average. This bullish phenomenon signals an intermediate trend change.
Image Source: Zacks Investment Research
7. Seasonality: Seasonality trends can play a key role in how the market behaves. Pre-presidential election years, like the one we are in now, tend to provide the largest gains on average.
Takeaway
Despite the negative news, sentiment, and recent volatility, stocks are taking steps toward entering a classic bull market. However, nothing is certain just yet. In order to provide more solid evidence, small-cap stocks will need to begin to participate in a larger way, and the ailing banking sector will need to stabilize. Bulls want to see continued strength in growth-tech and stabilization in names such as Bank of America (BAC - Free Report) ). As of now, the market is being carried by mega-cap tech stocks such as Apple (AAPL - Free Report) ), Microsoft (MSFT - Free Report) ), and Nvidia (NVDA - Free Report) ).