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Is a New Bull Market Underway?

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What You Need to Know

  • Low expectations for the economy and corporate profits have pushed oversold stocks higher, LPL said.
  • Technical signals also support the notion that a new bull market has started, the strategists said.
  • Risks for more selling persist, however, they noted.

Chances that we are in a new bull market appear to have increased recently, LPL Financial strategists said in market commentary Monday.

Last week’s two better-than-expected inflation reports drove the S&P 500 to 16% above its June 16 low and only 11% below its all-time high, noted Jeffrey Buchbinder, LPL chief equity strategist, and George Smith, portfolio strategist.

“After this rebound, the key question investors are asking is whether this is a bear market rally that will soon fizzle or the start of a new bull market. There’s too much uncertainty to have a high conviction view right now, but we do believe the odds have risen that a new bull market has begun,” the pair wrote.

Low expectations for the economy and corporate profits have pushed stocks “nicely higher” after negative sentiment left major equities indexes oversold, Buchbinder and Smith said.

“Now that better news is priced into stocks with the S&P 500 price-to-earnings ratio approaching 18, the next leg higher may be tough. That move will likely depend on the market gaining more confidence that the inflation battle will be won, setting the economy up for a soft landing as the Federal Reserve slows its pace of rate hikes,” they wrote.

Technical signals suggest the recent market gains may represent a bull market rather than a bear market rally, according to the strategists. They noted that the S&P 500 closed Friday above a “retracement level” that historically indicates a new bull market has started.

“In all bear markets since WWII, when the index has risen above that retracement level, it has been the start the next bull market rather than a bear market rally which eventually fell to new lows,” they wrote.

Moreover, last Thursday, 87% of S&P 500 index companies traded higher than their 50-day moving averages, close to the 90% level that historically indicates a new bull market has started, according to the LPL strategists.

“While this is not a necessary condition for the end of the bear market, it would increase our confidence that a rally back to the old highs will come before a return to the June lows,” they wrote.

A month ago, the analysts would have said the market would probably retest its June lows, but now they believe it probably won’t.

“This is not just because of the positive technical analysis developments. It’s also about the news. The market became more comfortable with the inflation picture — seeing prices come down — and the likely path of the Fed. Meanwhile, earnings have been quite a bit better than many had feared,” they noted.

They cited reasons why a retest could occur, however, including the lack of market fear levels during the June lows historically associated with major troughs, which raises the possibility for another selling wave after the current bounce.

“Following the latest rally, the risk-reward for stocks has become more balanced. Still, with increasing odds that the June lows hold and our view that a soft landing may be as likely as recession, we remain comfortable with our recommended overweight to equities that we increased in early July,” they concluded.

“Stocks’ rebound past the 50% retracement level amid surging breadth are positive signals that a new bull market may be underway.”

The lack of market capitulation, the high risk of a Fed policy mistake, and geopolitical military risks, however, “suggest perhaps this rally may be due for a pause or even a bit of a retreat. But that doesn’t change our belief that stocks have more room to run through year end and into 2023. We maintain our year-end 2022 fair value S&P 500 target range of 4,300-4,400 with upside above that range in a soft landing scenario.”

The S&P 500 closed higher at 4,297.14 on Monday and was trading at 4,305.80 as of 3:30 p.m. ET on Tuesday.

(Photo: Shutterstock)