Nasdaq to end bear market, Dow to end correction after July CPI data

Nasdaq to end bear market, Dow to end correction after July CPI data

The Nasdaq Composite was on track to emerge from a brutal bear market on Wednesday, while the Dow Jones Industrial Average was expected to end a market correction as stocks rallied on cooler inflation in July.

The Nasdaq Composite COMP, +2.56%, was up 2.5% near 12,810 in midday trade. According to Dow Jones Market Data, a close at or above 12,775.32 would mark a rise of 20% or more from the June 16 Nasdaq closing low of 10,646.10, meeting widely accepted criteria for exiting a bear market (see chart below).

The Dow DJIA, +1.49%, meanwhile, rose about 540 points, or 1.6%, to nearly 33,315. A close above 32,877.66 would see the blue chip indicator, which has dodged a bear market, post a 10% or more gain from its correction low.

Stocks found support after a July CPI showed a better-than-expected slowdown in rising prices. However, some market watchers have been wary of giving the all-clear when indices cross an arbitrary threshold.

“One of the most enduring signals of when we’re exiting a bear market is when 90% of S&P 500 stocks break through their 50-day moving average and then move toward escape velocity,” said Quincy Krosby, chief global strategist at brokerage LPL Financia , MarketWatch said by phone on Tuesday.

Only 77.3% of shares in the S&P 500 SPX, +1.94%, and 74.2% of shares in the Nasdaq Composite COMP, +2.56%, closed above their 50-day moving average on Monday, according to Dow Jones Market Data .

See: We are in a bear market rally and you can expect a break of the June 2022 lows

The Nasdaq fell 33.7% from its recent high to the bear market low and has been in bear market territory for 107 trading days. According to Dow Jones Market Data, the decline marks the deepest and longest bear market since 2008, when the index fell 54% and the period lasted 218 trading days.

Of course, for other indices, it’s the S&P 500 SPX, +1.94% – the US large-cap benchmark – that really counts when it comes to US equities. The index has also rallied but remains in a bear market after falling more than 20% since its record close on Jan. 3.

Morgan Stanley’s Michael Wilson, one of Wall Street’s most vocal bears, also argued that the best part of the rally was over.

“The rally in equities has been strong, leading investors to believe the bear market is over and looking forward to better days,” the chief investment officer said in a note to clients Monday. “However, we think it is premature to give the all-clear just because inflation has peaked. The next move down may have to wait until September when our negative operating debt thesis is better reflected in earnings estimates. However, given these stretched valuations, we believe the best part of the rally is over.”

See: Veteran strategist Dennis Gartman says this is still a bear market with no Fed pivot in sight

Meanwhile, the Dow Jones Industrial Average DJIA, +1.49%, the popular benchmark for 30 so-called blue-chip companies, has not only dodged a bear market but has traded on the cusp of exiting the correction zone. The Dow has not suffered a 20% drop – the arbitrary market used in a popular definition of a bear market. However, the price’s decline of more than 10% from its record close in early January qualified for a market correction.

See: A rising stock market is about to signal a “big” move — but there’s a catch

What the story tells us

So what does history tell us about the Nasdaq as it enters the bull market and what does it tell us about the Dow as it posts a correction?

Dow Jones Market Data has compiled the following tables:

Nasdaq to end bear market Dow to end correction after

Nasdaq performance after entering a bull market.

SOURCE: DOW JONES MARKET DATA

1660152552 52 Nasdaq to end bear market Dow to end correction after

The table below is based on all corrections since 1950 but excludes corrections that later turned into bear markets.

SOURCE: DOW JONES MARKET DATA

1660152552 514 Nasdaq to end bear market Dow to end correction after

The last 20 corrections and the following performance in the DJIA

SOURCE: DOW JONES MARKET DATA