As financial enthusiasts and seasoned investors, we are always looking for signs, signals, and indicators that help us navigate the complex financial markets. Today, I want to share with you an intriguing analysis of the current market situation and a historical parallel that may hint that the bear market has already ended, at least for Nasdaq.
As you know, the 2022 was a tough year for the Nasdaq, with the index plunging 35%. However, we've seen some rays of hope in 2023 as the Nasdaq began to recover, recently achieving a 61.8% retracement of the 2022 bear market's drop.
Among the tools I use to analyze market conditions is the custom indicator that measures the strength of the price move. While the market was in recovery mode, the indicator just reached a reading of 17.8% last Friday. This is significant. Why?
In the past four major bear markets (1990, 2000-2003, 2008 and 2020), whenever this indicator reached a reading of over 17%, higher prices followed, indicating a solid recovery. This pattern suggests a momentum shift from a bearish to a bullish trend, typically signaling a recovery phase. As we stand today, witnessing a reading of 17.8%, we may be on the brink of a similar phase.
Let me set the context by reviewing the prior 4 bear markets below.
1990 Bear Market and 1991 Recovery
The 1990 bear market in the United States was caused by a combination of factors: Iraq invaded Kuwait in August 1990, leading to economic sanctions against Iraq by the United Nations. This invasion caused a spike in oil prices and contributed to fears of a recession. In July 1990, the U.S. entered a recession that lasted until March 1991. The causes of the recession included tight monetary policy aimed at curbing inflation and the aforementioned spike in oil prices. There was also concern about the Federal Reserve's monetary policy, with some critics arguing that the central bank was too slow to ease interest rates.
This confluence of factors led to a significant drop in the stock market in 1990. However, the bear market was relatively short-lived, and the market began to recover in 1991 as the economy emerged from recession.
The chart below shows that when NDX started to recover early 1991 and the indicator reached a reading above 17%, it signified the end of the bear market and subsequent recovery. NDX continued to rise for the rest of the year and reached multiple new all time highs by the end of 1991.
NDX, 1990 - 1991
The 2000-2003 Bear Market
The early 2000s were dominated by the aftermath of the dot-com bubble and 9/11 attacks. The bursting of the tech bubble led to a severe contraction in the tech sector, causing the Nasdaq, heavy with tech stocks, to plummet. The 9/11 attacks compounded the economic distress, leading to one of the most challenging periods for the US economy.
However, in 2003, as our custom indicator broke above 17%, it was a sign of a potential market recovery. The economy started to bounce back, helped by strong monetary and fiscal stimulus. Subsequently, the Nasdaq continued to climb and recouped many of its losses by mid-decade.
NDX, 2003 - 2004
2008 - 2009 Bear Market and Recovery
The financial crisis of 2008 was one of the most severe economic crises since the Great Depression. Triggered by the subprime mortgage crisis, it rapidly evolved into a global banking crisis. Stock markets around the world plummeted, and the Nasdaq was no exception.
However, in 2009, as our custom indicator reached above 17%, it signaled the potential end of the bear market. Bolstered by aggressive monetary policy and fiscal stimulus, the market began a recovery process that would result in one of the longest bull runs in history.
NDX, 2008 - 2009
2020 Bear Market and Recovery
The COVID-19 pandemic induced an unprecedented global shutdown. The economic impact was immediate and severe, with the Nasdaq dropping precipitously in early 2020. However, the downturn was short-lived, and recovery was swift due to massive monetary and fiscal stimulus measures.
Once again, our custom indicator provided a timely signal. When it reached above 17%, it confirmed the bull move. The Nasdaq not only recovered its losses but reached new all-time highs.
NDX, 2020
2022 Bear Market and Recovery
The recent bear market saw the Nasdaq drop by 35%. The causes are numerous and complex, ranging from concerns about inflation, tapering of monetary stimulus, to uncertainties about global growth.
Yet now, as we see our custom indicator reaching above 17%, we have a hint of possible recovery. The chart for this period shows the downturn in 2022 and the initial recovery in 2023. Our indicator, once again, suggests that we may be on the cusp of a new bull market.
NDX, 2022 - 2023
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