Negative sentiment normalizes, bear market rally begins

Chart of the week

The chart shows the performance of the beiten US market index S&P 500 with and without the largest and best-known technology stocks since 2020.

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Why this is important

The U.S. market is heavily driven by a number of well-known stocks. In 2021, any investor invested in Facebook, Amazon, Apple, Microsoft, Google, Tesla, and Nvidia could beat the market by a long shot. In 2022, it was just the opposite. Those who were invested in these 7 stocks had to accept heavy losses.
One should pay attention to a broad diversification in one's portfolio. In 2021, all supporters of diversification were punished, but in 2022 they were proved right. Only broad diversification protects against big losses.

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Negative sentiment is normalizing

The correction since the beginning of the year was painful, but not completely unexpected.

We already showed this chart last year to illustrate how far the valuation of the stock market in the USA has departed from reality. The chart shows the development of transport delivery volumes in the USA compared to the broad stock index S&P 500. The broad market mostly follows the physical expansion of the economy, which can be seen in the volume of transported goods. Even in the Internet age, goods must be physically transported to the customer.

The situation now seems to be slowly settling back to the pre-Covid era. The air is going out of the stock market and the transported volumes are increasing. However, the process is not yet complete.

The chart shows the development of the price/earnings ratio (P/E) of the US stock market. The P/E serves as a measure for the level of valuations of companies. If an investor buys a company, he would currently have to wait 17 years until his investment yields a profit and his invested sum is paid back. The valuation has fallen from 23 this year to 17 and is now already below the average of the last 10 years.

The chart shows the amount of change in the P/E since 2007. The reduction of the P/E was faster and larger than during the financial crisis or the Covid crisis. For us, this is a clear indication of an exaggeration and shows the great panic on the markets.

The chart shows how financial analysts have changed their earnings estimates for American companies in recent weeks and months. In all regions, these were revised downward. The revision in the USA was far above average. Financial professionals were also infected by the panic mood.

Fundamentally, it was therefore clear that the current correction was too strong and that a counter-correction was due sooner or later. There is a stock market saying "Never catch a falling knife". One should not try to catch a falling knife. It is more advisable to wait until it hits the ground, then you can safely pick it up. To determine this moment, one likes to look at the technical financial market analysis.

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Bear market rally begins

The chart shows the price development of the NASDAQ technology index. This index includes all the major technology stocks that have led the market decline in recent months. The price has now reached the lower end of the falling price channel, where a counter-correction often occurs. Other technical indicators such as the RSI (Relative Strength Indicator) or the MACD (Moving Average Divergence) also show that the knife has now very likely hit the bottom.

The chart shows the performance of the Euro Stoxx 50. Here, the picture is technically even more positive. Not only have we broken through the downward channel to the upside, but we have also laid the foundation for a new upward trend.

But beware: even if the NASDAQ gains 15%, we are still in a downtrend or bear market. That is why the current price movement is also called a bear market rally. An upward movement in a downward trend.

The chart shows how strongly bear markets have corrected since World War II when they turned from a boom into a recession. A definitive trend change is possible, but unlikely. It would be the bear market with the smallest price decline since 1946.

This chart also shows the bear markets since 1946, but not the loss in value but the duration of the correction in days. Again, the current correction is one of the shortest.

Our conclusion: One can now enjoy the price gains of the coming price rally, but should not become too optimistic. The probability is high that the correction is not over yet.