Are Nasdaq stocks in a bull market? A story of fake heads said to slow your roll

Before handing out cigars to celebrate the birth of a bull market for the Nasdaq Composite, investors might want to take a look at some history.

Of course, the tech-heavy gauge ended Wednesday up 20.8% from its 2022 closing low of 10,646.10 set on June 16. A 20% rise from a recent low after falling in a bear market is a popular metric for declaring the start of a new bull market. Skeptics, however, point out that the Nasdaq has delivered more than a few rigged heads in the past.

Hedge fund manager Michael Burry, made famous in the book “The Big Short”, after successfully predicting the collapse of the real estate market during the financial crisis, questioned on Twitter: “The Nasdaq is a bull market because it’s up 20% off its low Who invents this thing?

In the since-deleted tweet, he noted that, “After 2000 the Nasdaq did it 7 times falling 78% to its 2002 low.” (Burry often deletes tweets after a short time.)

Indeed, the Nasdaq has seen three rallies of 40% or more in the bear market following the dot-com breakout, none of which marked the start of a lasting bull, strategy analyst Ross Mayfield investment at Baird Private Wealth Management, told MarketWatch in a phone interview.

“Our main line for clients has been that these bear market rallies can be frustrating but they are very common,” Mayfield said.

Such are the dangers of trying to use the 20% measure as a rule of thumb for declaring a bull market. In some ways, the start of a bull market is often only clear in retrospect, much like the challenge of determining the start of a recession. While consecutive quarters of gross domestic product contraction are often described as a “technical” recession, that is not the criterion used by the National Bureau of Economic Research to date the business cycle.

Besides qualms about using the 20% threshold to declare a bull, Mayfield said other features of the Nasdaq rally — its breadth, length and breadth — are a challenge for those looking for real-time confirmation.

The broad stock market rally has been impressive from a leadership perspective, and the magnitude has improved. When it comes to the S&P 500 large-cap benchmark, around 85% of Nasdaq constituents are trading above their 50-day moving average. That’s solid, but bull markets typically see a number above 90%, Mayfield said.

Related: Why the US stock rally looks more like a new bull market than a bearish bounce to these analysts

Meanwhile, semiconductor stocks have faltered in recent sessions after warnings from industry heavyweights Nvidia Corp. NVDA,
-0.86%
and Micron Technology MU,
+1.50%Inc.
It’s an important element of the Nasdaq and may represent a vulnerability, he said.

And finally, the upside simply didn’t last long enough to engender confidence in a bull market, Mayfield said, noting that bear market rallies in the past have lasted up to 60 to 80 to 100 days before to lower.

That’s not to say it will be the case this time around, but if you want to call a bull market on sheer magnitude and duration, “it has to be more compelling than having just passed the 20% mark in about six weeks,” Mayfield said.

Mark Hubert: This 20% Nasdaq gain doesn’t mean we’re in a new bull market

The Nasdaq fell 0.6% on Thursday and remains down more than 20% from its record close in November. The S&P 500 SPX,
-0.07%
remains in a bear market but has rebounded nearly 15% from its 2022 low set on June 16, while the Dow Jones Industrial Average DJIA,
+0.08%
circumvented a decline in the bear market.

While the jury is out on whether the Nasdaq is in for another bull or just a bear market rebound, investors should look to swing into higher quality stocks, especially in tech and growth, while reducing the risk. exposure to lower quality assets, Mayfield said. The zero interest rate and high liquidity environment that accompanied the last bull market is unlikely to be repeated in the next market cycle as the Federal Reserve deals with the aftermath of soaring inflation. , meaning investors will need to be more selective when trying to pick winning stocks.

“We’re definitely not bearish,” Mayfield said, “but this is a good opportunity to reshape toward quality with what we think is still a 6-12 month challenge ahead with where inflation is. , what the Fed is still doing” and the lingering geopolitical uncertainty on the horizon.

Read next: Have stocks bottomed out? Not until this stock market “gorilla” moves, warns BofA.

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