Five Signs the Market May Be Heading for a Sustained Uptrend

Many investors view the current stock market the way Charles Dickens, in “A Tale of Two Cities,” described the period preceding the French Revolution: “It was the worst of times.” These days, however, may actually be what the author, in the same unforgettable sentence, also termed “the best of times” — to invest, that is. In the market, these extremes are often present simultaneously, or at least overlap. What many people think are the worst of times to invest are often actually the best, and vice versa. And one of the best times is when there are good reasons to believe the bull will morph into a young bear.

There are significant indications that the market may have already hit the bottom of the current bear cycle. And if it hasn’t, the bottom is probably not far off. Anticipating a bear bottom (no pun intended) is not like microsurgery. For long-term investors, success doesn’t depend on absolute precision. It’s more like horseshoes, hand grenades and nuclear weapons, being close enough definitely counts.

Calling the bottom precisely — a nearly impossible feat — isn’t the point. The point is not to fall into that common trap: selling low out of disgust when values decline and then buying back high after the recovery is well underway. Many surveys exist that show this to be how most individual investors undermine themselves.

The goal is to hang tight and add to equities after a sustained uptrend begins or appears on the horizon. You may not get all the market’s recovery gains this way, but you also won’t suffer losses from lunging at a faux recovery. The key is to see recoveries coming or to at least recognize them after they’ve arrived.

You’d be hard-pressed to convince many investors that things are looking up these days, as they’re in a foul mood over the economy. Continued high inflation is prompting the Federal Reserve to raise the federal funds rate to douse the still-hot economy and tamp down inflation. This triggers rises in other rates, and the resulting fears fester, becoming a general malaise that is exacerbated when people conflate the economy with the market.

Although the economy does affect the market to a certain extent, they are different entities with different dynamics. They are like estranged cousins who may see each other at Thanksgiving but otherwise rarely speak because they are fundamentally different: Economic data is necessarily backward-looking, and the market is perforce forward-looking.

Thus, confusing the two can lead to misplacing forecasts of economic downturn on market projections, even if these forecasts prove to be correct. One of the greatest bull markets of all time began in the U.S. during the Great Recession. Another bull market started in 1982, when inflation was also high.

The foul mood of investors over the economy and the market is conveniently keeping values down, providing an opportunity for gains.

Of course, investing now would require a conviction that we’re at a propitious point, that the market is likely to rally in the near term. Which not to say that our highly volatile market won’t descend from here, losing its October gains before beginning to trend upwards. That could easily happen, but it’s not the question those inclined to invest should be asking. What they should be asking is: Will major indexes retrace their mid-June lows and then take many months to reach current levels?

Not obsessing over buying at the bottom means accepting some red ink in your holdings for a while — and not knowing when it will turn black. But, as your mother may have told, patience is a virtue. Waiting is part and parcel of accepting the idea that you can’t pinpoint the bottom. The idea is to shorten the wait, but not to wait so long that when you do get in, you commit the blunder of buying high.

Here are some positive indications that the worst is probably behind us, and that 2023 will likely be a better year.

Periods after midterm elections are historically good, as they typically result in divided government, which markets like because it reduces uncertainty. In the 12-month periods after midterm elections, the S&P 500 has been positive every time since 1946, with an average gain of 15.1% compared with 7.1% in non-midterm years. This is highly significant because few patterns are rarely as stable as this one.

Midterm elections, of course, always fall in the fourth quarter, which is as typically good a quarter for market indexes as the third (particularly September) is a bad one. As we approached the fourth quarter, various analyses show that the market, which was long overbought, is now oversold, indicating a likely uptrend from new investment because cash sitting on the sidelines gets sent into the game. And cash inflows from big institutional investors — always a sign that the pros like conditions — has recently been increasing. At this point in a bear market, it doesn’t take much good news for a broad array of investors to start piling in.

The frequency of daily up-and-down movements of 1% to 3% that we’ve seen in recent weeks is fairly typical of market bottoms or, at least, of periods close to bottoms. And as of mid-October the market had exhibited more negative 1% days than in any year since 1931. Moreover, the market’s gain pattern from mid-September to mid-October — five days of gains of 2% or more — is similar to those that occurred ahead of market bottoms in 2020 and 2018. This clustering of highly volatile days and healthy gains could indicate that, black swan events notwithstanding, the market might be on track to show more upside than downside, but not without being quite messy in its herky-jerky ascent.

Bears only roam for so long before going back into hibernation. Historically, the average bear market lasted 289 days. The current one officially started the first week of January; thus, average duration would have had it ending the third week of October. If this bear’s longevity proves to be more or less average, it may be holed up in its cave this month or the next.

These times are so bearish that they’re bullish — for those contrarians who, anticipating growth, buy low when stocks are shunned. Messages of market doom and gloom are everywhere. Headlines about “lost wealth” abound, and talking heads shake woefully over fallen indexes. But one must remember that paper losses aren’t real unless one sells. Being a contrarian means being out of step. And out of step is a good thing to be when most people wait for the rest of the herd to start buying and end up paying high prices for equities, significantly limiting eventual gains. True contrarians are likely attuned to the current abundance of signals that the bear is ending or that it will end soon.

Well before the bear market is officially over, the market’s long-term upward arc will resume. More than any other factor, this arc is driven by the digital revolution, the 21st century’s equivalent of the industrial revolution that affects not just tech products and services but virtually every industry. As for tech itself, the sector is way down and likely to come roaring back after fears about interest rates abate.

By the time that happens, we’ll already be looking back on 2022, in a sort of Western version of the Chinese zodiac, to the Year of
the Bear.

Dave S. Gilreath, CFP, is a 40-year veteran of the financial services industry. He is a partner and the chief investment officer of Sheaff Brock Investment Advisors, LLC, a portfolio management firm for individual investors, and Innovative Portfolios, LLC, an institutional money management firm based in Indianapolis that manages about $1.3 billion in assets nationwide.