2022 has been a historically bad year for the stock market, with the S&P 500 having corrected over 20% year to date. Despite all the gloom and doom that currently permeates the media, I am of the belief that the worst is behind us and that the we are on the verge of new bull market. Here's my case for the emergence of a new bull market.
I recently received a text from someone that he is giving up on the stock market since it is "so unreliable" and he instead is going to focus on gambling on college football and forex trading. This is the exact type of comment that usually happen around major market lows, as the casual participant gives up and "throws in the towel." Bearish sentiment began to reach extreme levels this summer and continues to flourish. This is merely part of the stock market psychological cycle that has been going on for centuries and will continue to repeat as long as markets exist.
It is interesting to note that we are also entering a time of year that is usually bullish. Typically, the first part of the mid-term year is weak, while the stronger action comes after the election. While not a perfect science, it is something that I keep in the back of my head while trading. In addition, earning season can often be a catalyst for the market.
Accumulation On The Indexes
Of more importance is the action of the indexes. We saw an undercut of the June low on the S&P 500, which brought some fear into the market and quite possibly also some capitulation. We've seen some nice accumulation start to appear over the last few weeks, which is a good sign of institutional participation. Now, we would also like to see a dearth of distribution. I can see a scenario where the S&P 500 has indeed bottomed but needs some time to back and fill as the final weak hands are flushed out and the market digests any further news.
Another positive sign is the strong action on the Russell 2000, which shows smaller cap stocks are starting to be accumulated.
This is the one area I would like to see more participation in. I took a position in VRTX as it broke out after getting stopped out on multiple attempts in the months prior. LLY has also been acting extremely well. Solar stocks like ENPH are starting to show a come back after correcting hard earlier this month. While this is all a good start, I would like to see an expansion of stocks entering the new high list.
Finally, we've seen some strong action come into Bitcoin and Ether recently, which both look like that have most likely bottomed. This may also be a subtle sign that there is some appetite for risk entering the market.
While there is a case for the bull side, it is important to remember to take things slowly. The market may chop around for a few months as I highlighted earlier. In addition, there is always the possibility that things change very quickly and the market reverses lower. That's why it is always important to keep risk management as the foundation of your trading. If we are indeed in a new bull market, there will be plenty of opportunities for trading in the coming months.
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