The Nasdaq flirted with a bear market exit, but strategists say the push isn’t strong enough to enter a bull cycle

The Nasdaq Composite flirted with breaking out of bear market territory earlier this week as the tech-heavy index continued to bounce off June lows before suffering a setback – but even a fresh push above the threshold exit would not convince some strategists that the bear has been defeated.

According to Dow Jones Market Data, a finish at or above 12,775.32 would mark a 20% increase over Nasdaq’s COMP,
-1.19%
The June 16 closing low at 10,646.10 fulfills the general condition to enter a bull market (see chart below).

SOURCE: FACTSET

The Nasdaq traded above the threshold on Monday, but did not close above it. The index was down 1.3% on Tuesday afternoon near 12,480. But a bull market is more than just an arbitrary threshold.

“One of the most enduring signals when we exit a bear market is when 90% of S&P 500 stocks hit their 50-day moving average and then head into breakout velocity,” Quincy Krosby, Global Strategist chief at brokerage LPL Financia, MarketWatch told Tuesday by phone.

According to Dow Jones Market Data on Monday, only 77.3% of the S&P 500 SPX,
-0.42%
shares and 74.2% of Nasdaq Composite COMP,
-1.19%
shares closed above their 50-day moving average.

“Much of the S&P 500 has been in bearish territory since February 2021. The technical bear didn’t hit until the bear engulfed what we call market leadership, which is big tech” , Krosby said. She thought the bear might not last as long as it was in the system before it bottomed out in June.

See: We are in a bearish rally and you can expect the June 2022 lows to be broken

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

For the other indices, of course, it’s the S&P 500 SPX,
-0.42%
— the US large-cap benchmark — which really matters when it comes to US equities. The index also rebounded, but remains in a bear market after falling more than 20% from its January 3 high.

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

“The rally in equities has been strong and investors believe the bear market is over and are looking forward to better times,” the chief investment officer said in a client note on Monday. “However, we think it’s premature to ring the bell simply because inflation has peaked. The next lower leg may have to wait until September, when our negative operating leverage thesis is better reflected in earnings estimates. However, with such stretched valuations, we believe the best part of the rally is over.

See: Veteran strategist Dennis Gartman says it’s still a bear market with no Fed pivot in sight

Meanwhile, the Dow Jones Industrial Average DJIA,
-0.18%,
the popular gauge of 30 so-called blue chip companies, not only dodged a bear market, but traded on the verge of breaking out of corrective territory. The Dow Jones didn’t suffer a 20% decline – the arbitrary market used in a popular definition of a bear market. Its drop of more than 10% from its all-time high in early January, however, qualified as a market correction.

A finish at 32,877.66 or higher would mark a 10% rise from the 2022 Dow Jones low finish at 29,888.78 on June 17, meeting popular criteria for exiting a correction. The index lost 61 points, or 0.2%, to trade at 32,769 on Tuesday. after paring back an earlier gain of more than 300 points on Monday morning.

Corporate earnings came out stronger than expected for the second quarter, with more than 77% of S&P 500 companies beating earnings estimates, according to I/B/E/S data from Refinitiv, fueling some of the market gains .

“A better-than-expected Q2 earnings season has underpinned the stock market’s 10% rally over the past three weeks,” Goldman Sachs strategists led by David J. Kostin wrote in a client note Monday. “S&P 500 EPS grew 10% in Q2 year-over-year, faster than analysts expected 6% growth at the start of the reporting season. 52% of S&P 500 companies grew beat the consensus EPS forecast by more than one standard deviation from estimates, below the trend of the past four quarters. Margins and sales contributed equally to the upside surprise.”

See: A booming stock market is about to signal a ‘huge’ move – but there’s a catch

What history tells us

So what does history tell us about the Nasdaq if it enters bullish territory, and what does it say about the Dow Jones when it comes out of a correction?

Dow Jones Market Data has compiled the tables below:

Nasdaq performance following entry into a bull market.

SOURCE: DOW JONES MARKET DATA

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

SOURCE: DOW JONES MARKET DATA

The last 20 fixes and the following performances in the DJIA

SOURCE: DOW JONES MARKET DATA

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