Bull Market Rally vs. Bear Market Rally

In bull market rallies stock indices trend together.  Making new highs at about the same time and declining together.  Moves up during large bear markets tend to be more erratic.

A comparison of the post October 2022 U.S. stock market rally with a prior bullish phase reveals some interesting insights.

The U.S. stock rally that began on 10/13/22  has as of 06/02/23 lasted 159 – trading days.  If this move up is presumably a new bull market its performance should match that of prior bull markets. 

The U.S. stock bull market that began in March 2020 came after a crash and fueled by liquidity from the U.S. Federal Reserve.  This triggered a very dynamic rally.   To get a view of a more standard stock bull market, the up phase that began in December 2018 provides a good example.

The daily S&P 500 (SPX), Russell 2000 (RUT), and Consumer Staples Sector (XLP)  chart courtesy of Trading View illustrates the action from 2018 to 2019.

The RUT is composed of small – cap stocks which tend to underperform the SPX during economic weakness.

The XLP has the stocks of some of the largest and most stable U.S. companies, such as Procter & Gamble and Pepsi.   This index will sometimes outperform the SPX.

All three indices bottomed out on 12/26/18, adding 159 – trading days targets 08/14/19 at the end of the comparison period.

From December 2018 to May 2019 all three trended up together.   Then in May a correction began.  Note that in mid- May the XLP made a new high.   In early June both the SPX and XLP made new rally highs – this is a bullish “rule of the majority” signal.   By August 2019 at the end of the comparison period, all three were in a corrective phase. 

Months later in November 2019 all three indices were making new bull market highs.

The next SPX, RUT, and XLP chart examines the bull phase after mid – October 2022. 

Note that the XLP bottomed out on 10/07/22 while the SPX and RUT ultimate lows were on 10/13/22. 

As of 06/02/23 both the RUT and XLP had significant bearish divergences vs. the SPX.  What’s most amazing is that XLP made a new decline low on 06/01/23, while the RUT was not only above its 05/31/23 low it was also above its 05/04/23 bottom!  An index that can sometimes be more bullish than the SPX is now more bearish than an index of small – cap stocks!

At the end of  2019  all three indices were making new bull phase highs.  Could all three indices make a new bull phase high later in 2023?  Yes, anything can happen but is it likely?   Market analysis focuses on probabilities not certainties.  The XLP 2019 mid-May high and its early bottom in October 2022 were clues that momentum may favor the bulls.

The shocking evidence that XLP made a short-term low after the RUT is a powerful clue that momentum may favor the bears.

There is considerable risk holding or entering long positions on most U.S. stocks.