Have U.S. Stock Markets Set Their Bear Market Bottom?

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Have US stock markets bottomed out? From a technical analysis point of view: yes, there is a very good chance that they will. From a fundamental point of view: it gets complicated.

Looking at the fundamentals, there are a lot of things that can weigh on the markets. Some things to consider are: earnings, China, Russia, inflation, interest rates, supply chain issues, European energy crisis, real estate in China, rising Covid cases , etc.

As awful as it sounds, bad news could actually be good news for stock markets. It all boils down to performance.

Currently, some major banks are saying markets now price the risk of a US recession at 100% before the end of the year. In fact, the The United States could officially be in recession by the end of next week. We get Q2 US GDP data on July 28, 2022…the day after the Federal Reserve’s interest rate decision. The key question for investors going forward is whether the markets have indeed priced in a recession.

Why would the markets react positively to a recession? This would mean the end of the Federal Reserve interest rate cycle. Typically, when there is a recession, central banks start cutting interest rates in order to stimulate the economy. If interest rates fall, equities again become the best place to go for yield. Many argue that with higher interest rates money will flow back into bonds. This is important because many funds and fund managers follow the stock/bond asset allocation model.

However, we have to talk about inflation. Yes, bonds are currently yielding around 3%, but if you factor in inflation in real terms, you are still losing money holding bonds. We could enter a crazy scenario where the economy slows down but inflation continues to rise. A situation known as stagflation.

The treatment? Well, there isn’t according to Investopedia:

There is no definitive cure for stagflation. The consensus among economists is that productivity must be increased to the point where it would lead to higher growth without further inflation. This would then allow monetary policy tightening to curb the inflation component of stagflation (this is easier said than done, so the key to preventing stagflation is to be extremely proactive in avoiding it).

When I read the line that says we need to increase productivity, I automatically think of government spending. Governments will have to spend a lot to try to increase productivity. This means more money printing at a time when interest rates are high. It doesn’t look too good but that will be a story for another time.

It should be noted that in times of inflation, stock markets tend to perform well. Again, it comes down to the idea of ​​making a return. If inflation is at its peak, then you need to make some return on your money that beats that inflation. Gains like this are found in the stock market.

There’s a lot to cover when it comes to fundamentals, but I like to bring it back to central banks. I mean their policies of keeping interest rates artificially low after 2011 are causing the bubble at all. Central banks will make or destroy these markets. The other issues I listed could be considered black swan events. Something the markets have yet to price in and which would obviously take the markets by surprise.

Many of you know that my specialty lies in technical analysis. Recently, global markets are showing signs of a reversal indicating that this could be the bottom of this bear market. In fact, many European indices confirmed the trigger breakouts while US markets did not. Perhaps a telltale sign that US equity markets will follow suit.

And we are very close to following. US stock markets are in a range and just waiting for the breakout. The S&P 500 chart above is just one step away from confirming a breakout and potential reversal. We need a close above this resistance at 3920 to stay long. My breakout of the trendline also indicates that the downtrend is coming to an end.

Volume is often a strong indicator of a reversal when paired with a technical breakout. The volume has indeed increased lately, but the summer months tend to see lower volume. I would make it a priority to see the volume profile if these US markets break out.

I say if because we could see a rejection at 3920 and continue to hold that range. It’s already happened three times since June. However, with the reversal in European stocks, there is a strong chance that US stocks will follow.

Analysis of Weinstein's stage in Chartmill |  ChartMill.com

People know I like my market structure, and indeed we are in the range part after a downtrend in US equity markets. Referring to the image above, Stage 4 is about to end and the markets are currently in Stage 1. A breakout triggers Stage 2, or an uptrend. Things are looking very positive from a technical analysis perspective!

Finally, let me show you the Nasdaq, Dow Jones and Russell 2000 charts.

TradingView Chart

TradingView Chart

TradingView Chart

The structure is the same. All of these markets look likely to confirm a daily breakout at the close of the candle and trigger a new uptrend.

Next week we will have many US-related events that will affect the stock markets. I am referring to the Fed’s July 27 rate decision and the July 28 second quarter US GDP data. It is likely that these events will be priced into the markets, but if there is a major surprise, the markets could react in a volatile way. The question is whether these surprises will keep the momentum of the breakout going or bring it to a halt.

As a technical analyst, I can tell you that the markets are showing very positive signs of reversal. Evasion is the only missing element. A new uptrend is looking to begin which will at least provide us traders with a good swing trade opportunity.

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