Before investors hand out cigars in celebration of the birth of a baby bull market for the Nasdaq Composite, investors might want to take a look back at history.
Sure, the tech-heavy gauge closed up 20.8% on Wednesday from its closing low of 10,646.10 for 2022, set on June 16 in the new bull market. However, skeptics point out that the Nasdaq has historically delivered more than a few head fakes.
Hedge fund manager Michael Burry, made famous by the book The Big Short after successfully predicting the collapse of the housing market in the financial crisis, tweeted: “Nasdaq is a bull market because it’s 20% below its low ? Who invents this stuff?”
In the since-deleted tweet, he noted, “After 2000, the Nasdaq did this seven times, falling 78% to its 2002 low.” (Burry often deletes tweets after a short while.)
In fact, during the bear market that followed the dot-com breakout, the Nasdaq experienced three rallies of 40% or more, none of which marked the beginning of an enduring bull, Ross Mayfield, investment strategy analyst at Baird Private Wealth Management, told MarketWatch in a phone interview.
“Our main line with clients has been that these bear market rallies can be frustrating but are very common,” Mayfield said.
These are the dangers of trying to use the 20% measure as a rule of thumb to declare a bull market. In a way, the onset of a bull market is often crystal clear only in hindsight, much like the challenge of pinpointing the onset of a recession. While consecutive quarters of contracting gross domestic product are often referred to as “technical” recessions, that’s not the criterion the National Bureau of Economic Research uses when dating the business cycle.
Aside from concerns about using the 20% line to declare a bull market, Mayfield said other characteristics of the Nasdaq rally — its breadth, length and magnitude — pose a challenge for those looking for real-time confirmation Looking for.
The broad stock market rally has been impressive from a leadership perspective, and breadth has improved. Looking at the large-cap benchmark S&P 500, around 85% of Nasdaq components are trading above their 50-day moving average. That’s solid, but bull markets typically see a figure above 90%, Mayfield said.
Related: Why the US stock rally looks more like a new bull market than a bear bounce to these analysts
Meanwhile, semiconductor stocks are down in recent sessions after warnings from industry heavyweights Nvidia Corp. NVDA, -0.86% and Micron Technology MU, +1.50% Inc. faltered. That’s an important part of the Nasdaq and could be a weak point, he said.
Finally, the rise hasn’t lasted long enough to inspire confidence in a bull market, Mayfield said, noting that historical bear market rallies have lasted 60 to 80 to 100 days before turning lower.
That’s not to say it’s going to be the case this time, but if you want to call a bull market purely on the basis of scale and duration, “it has to be more compelling than having just surpassed 20% in about six weeks,” said Mayfield.
Markus Hulbert: This 20% increase on the Nasdaq does not mean that we are in a new bull market
The Nasdaq fell 0.6% on Thursday and remains more than 20% below its record close in November. The S&P 500 SPX, -0.07%, remains bearish but has recovered nearly 15% from its 2022 bottom on June 16, while the Dow Jones Industrial Average DJIA, +0.08%, bypassed a bear market decline.
While the jury is out on whether the Nasdaq is in a new bull market or just a bear market, investors should look to switch to higher-quality stocks, particularly in the technology and growth sectors, while reducing exposure to lower-quality assets , said Mayfield. The zero interest rate and liquidity environment that accompanied the last bull market is unlikely to be repeated in the next market cycle as the Federal Reserve grapples with the aftermath of the inflationary spurt, meaning investors will need to be more selective when attempting to pick winning stocks .
“We are certainly not bearish,” Mayfield said, “but this is a good opportunity to reshape towards quality as we believe this will be challenging 6-12 months from now in terms of inflation and what the Fed is still doing ‘ and continued geopolitical uncertainty on the horizon.
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