That’s right kids – we just experienced a spectacular bear market rally. It blew in like a hurricane, lasted through the first four months of 2019 and nearly broke all the bears in the process. Much of that bullish progress has now evaporated.
It’s still hard to believe that the markets rallied 25% from those depressing Christmas Eve lows to hit all-time highs on May 1. The bulls came so close, but they could not quite turn the long-term trend in their favor.
Yes, that was a bear market rally
At the end of each month, I review the monthly market charts and compare them to the MACD. If I see a crossover of the moving averages, it means we’re seeing a change in the long-term trend. Since October 2018, the markets have been in a bearish state.
Even with a long four-month rally, the bears have led the trend. I know that seems crazy, but throughout history some of the strongest rallies have occurred during bear markets. The longest ones – like this one – can easily fool everyone into thinking the bear market is over.
For four months, we mostly heard positive news from the Fed. Economic data had been pretty strong (3.1% growth in Q1). Tariff negotiations were underway (and then quickly went to pot in early May). Technical conditions had improved from a dismal Q4 in 2018. Bonds and other alternative investments were strong. Lower yields were not a problem nor a competitor to stocks.
With strong money flows, improved charts and decent earnings (many companies beat estimates in Q1), it made sense for traders and investors to be long equities. Until one morning in May, it all crumbled.
What to expect next
Are we going down to test the December lows again? Sure, anything can happen in a 600-point range. Market may continue bearish behavior – or they may swing higher into bullish territory.
I know that isn’t very comforting, so here’s my advice: Pay attention to the overall trend. Use the longer-term charts to help you determine the proper mindset as you trade. There will be big rallies, and there will be huge declines. Be as objective as possible, and you will be fine.