The Stock Market Is At A Bull/Bear Tipping Point

April has reversed most of the stock market’s March gains. That puts the indexes near their 2022 lows. So, now what? One of two likely scenarios: A double-bottom foundation that supports a new bullish rise, or a breakdown to new lows that confirms a bearish trend.

Start with 2021-22 picture of the stock market

Two items to note:

• First, the November-December 2021 rolling trend change. Its cause was a building uncertainty driven especially by the rising inflation rate and its negative effects. (For more, see my November 24 article, “Here Comes An Inflationary Storm Like None Before.“)
• Second, the 2022 weakening of the previously leading indexes: Nasdaq Composite and Nasdaq 100 (the largest Nasdaq listed companies). Often, when a bullish uptrend’s leaders weaken, it is a negative sign.

Next, examine the full 2020-22 Covid picture

Below are the four stock indexes, using daily data. The longer-term trend line is the 200-day moving average. The intermediate-term trend line is the 50-day moving average.

All four indexes (especially the previously leading Nasdaq ones) are exhibiting weakness and downtrends. The issues are lower highs and lower lows, falling through the trend lines, and the trend lines turning down.

Now to the tipping point

With the indexes at or near their previous 2022 lows, there are two primary routes the stock market could take.

• First is a bullish bounce, establishing a noteworthy double-bottom foundation. Such a move could be the positive sign that attracts buyers
• Second is a bearish decline to new lows, giving a confirmation signal that the downtrend is intact

The bottom line: So, which will it be?

Besides the serious inflation/interest rate uncertainties, there are three negative issues that argue for more lows ahead.

1. The up-down March-April pattern fits the bull-trap mold, and bull-traps are bear market events (See my March 31 article, “ Stock Market Bulls Attempt To Resuscitate Ailing 2021 Favorites – Don’t Get Trapped”)
2. This decline to the previous lows is happening despite supposedly positive earnings reports coming in
3. There continues to be a lack of articles expressing stock investing negativity, concerns and ominous visions. (This is a contrarian indicator because significant market declines end with a flood of negativity. Instead, we are getting recommendations of stocks to buy in times of inflation and rising interest rates.)

Therefore, cash reserves continue to be an attractive holding. They allow focusing on opportunistic investing rather than survival tactics.