For most of this year, markets have tumbled. In June, the S&P 500 officially fell into bear market territory. And many of us have been playing defense as our portfolios drop into the red.
But in July, markets started to tell a different story. The month marked the best period for stocks since November 2020.
All of this good news means there’s one looming question: Is this a bear squeeze… or is this the beginning of a new bull market?
Given how the market has been this year, it may seem presumptuous to even utter the word “bull.” But I’ll tell you straight up, the data has suddenly shifted and is very bullish.
Let’s work our way from the top down and see what I mean…
Oversold Bounce
The Big Money Index (BMI) most recently went oversold on July 14. When the BMI goes oversold, the forward returns are nothing short of spectacular. Here are the average forward returns from the first day of an oversold BMI:
- 1 Month: +2.7%
- 3 Months: +5.2%
- 6 Months: +9.2%
- 9 Months: +9.6%
- 12 Months: +15.3%
- 24 Months: +29.8%
Since the latest occurrence on July 14, the Nasdaq-tracking Invesco QQQ Trust Series 1 (QQQ) has risen 11.9%, and the S&P-tracking SPDR S&P 500 ETF Trust (SPY) is up 9.3%.
So, like clockwork, the oversold BMI strikes again…
But is it a bear squeeze or the start of a bull run?
Moving to our next layer, we start to get a clearer picture.
Buying Is Coming Back
The BMI is a 25-day moving average of all unusual buying and selling signals. If we look at these signals daily in the chart below, we start to see something interesting.
We’re suddenly seeing the most buying of all year:
We are even seeing some buying in ETFs for the first time in a long time.
This starts to frame a picture that institutional and professional investors are legitimately stepping in and adding risk.
OK, that’s great news, but should we really be getting excited?
What’s getting bought and sold gives us even better news…
Oversold Sectors Are Getting Bought
To really discern if this price action is bullish, we have to check in with the worst performing sectors this year. Discretionary and tech stocks have been bludgeoned since before we entered 2022.
The sectors performed miserably and have barely seen any buying at all.
But look at what we see here in these charts… the first significant blue buying in a long while:
Tech and discretionary companies are the engines of a growth market. So buying in these two areas is encouraging.
But it doesn’t stop there. We’ve also seen recent buying spikes in the utilities, industrials, health care, and staples sectors as well.
This puts more weight behind this potentially being a new bull market forming.
But what about the other sectors? While less significant, we still see buying in communications, real estate, and financials as well.
The only two sectors not seeing significant buying right now are materials and energy. But we can give them a break.
That’s because energy has been the strongest sector from the beginning of the year up through this summer, and materials also had a strong showing. So if they are taking a pause while big money flows into the other nine sectors, I’m not particularly concerned.
And the price of crude oil has fallen below $90 a barrel. And while that’s bad news for the explosive margins of energy stocks, that’s encouraging news for the consumer.
That’s because much of this wicked inflation that’s impacting everyday Americans is happening at the gas pump. Should prices continue to fall for oil heading into a historically seasonal dip in energy prices in the fall, this sets up well. The American consumer might get a little relief in the coming months.
I mentioned that the buying really started on July 27. We now know that shares in nine of 11 sectors are getting scooped up significantly. That’s solid!
And let’s look at what that distribution has looked like since the day the buying started. We can see there has been solid buying in tech, health care, and industrials. Discretionary and financial companies have also been seeing buying since the 27th:
And most importantly, we’re seeing a return to a more “risk-on” environment…
There has been notable buying in small- and mid-cap stocks. Typically in a bearish market, large and mega-cap shares attract capital because they are viewed as more stable.
Small- and mid-cap stocks are perceived as riskier. That’s why small-cap stocks haven’t been in favor so far this year.
But as you can see in the chart below, we’re now seeing sizable buying in these “riskier” areas of the market.
That’s exciting to see…
So Where Are We Headed?
So could it be a short squeeze?
Sure. I must concede that as a possibility. But the market is a forward-thinking machine. I believe the realization is setting in for investors that perhaps it’s not as bad as everyone is making it seem.
The case for shorts is dwindling as they have to cover their positions. And we’re seeing value hunters step in, thinking there’s an all-clear to buy. This can build the foundation for a new greed cycle in the market.
What I am seeing is risk being added in two prior beat-up sectors (tech and discretionary) and small caps, and broad buying across most sectors.
This fits with what I’ve said all along about ghost tightening. The Fed used scary language to deflate asset prices, starting with tech shares and crypto. Then the margin debt bubble popped.
With much of the leverage and speculation out of the system – and clarity coming increasingly from the Fed – the setup is good. The labor market is strong. Sales and earnings are largely working.
Perhaps we’ll get that soft landing after all.
Talk soon,
Jason Bodner
Editor, Outlier Insights