Remember, Its a Bear Market

I don't know what it was like in the 1970s during the high inflation period, but if I had to guess, this bear market looks similar to the 1973-1974 bear market, where SPX went down 49% from top to bottom in 21 months.  At the bottom in October, the SPX was down 27% from top to bottom in just over 9 months.  The bear market in 2000-2002, one which I actually experienced, with similar bubble characteristics, the SPX went down 50% from top to bottom in 28 months.  

SPX 1973-1974

SPX 2000-2002

Not saying that we're going to repeat those 2 previous brutal bear markets where the SPX was cut in half, but even a lesser bear market taking the market down a mediocre 35% from the top would take the SPX to around 3100.  

From both a technical and fundamental perspective, this is about as bearish of a market as I've seen since those dotcom bubble days.  Even in 2007, the SPX never got nearly as overvalued as it did at the end of 2021.  

Sometimes I think its just too obvious of a bearish setup, it must be a bear trap.  But then I look at the massive equity fund inflows for the last 2 years, and the ridiculous amounts of bullishness and bubble behavior in 2021 and it is a classic post bubble bear market here.  And the biggest and worst bear markets happen after bubbles. 

The first half of 2022 was a struggle to get rid of my bull market trading psychology built up over 13 years of a raging bull market.  It took time to embrace the bear market and adjust to the new reality that will be around for a while.  It was only after Powell went full hawk at Jackson Hole to fully realize that the SPX was now a short seller's market. 

For 2023, anytime the market even gets a little bit excited and optimistic about stocks, it is time to short.  There are so many underwater longs that are looking to get out on a big rally that any rallies that take the SPX towards 4000 or higher are great opportunities to layer on shorts.  There is a lot of overhead resistance.  The psychology of the US stock investor has changed.  They are no longer looking to chase momentum and look for home runs, they are just hanging on, hoping for a miracle soft landing and/or Fed to come to the rescue, expecting it to rocket the SPX higher.  Hope is not a strategy.  

The bearish turnaround in the market on Wednesday seems to have surprised a lot of bulls.  The PPI came in weaker than expected, economic data came in weak and boosted the bond market, and stocks liked it at first, but then sold off aggressively to close at the lows.  The stock/bond correlation is changing.  Bonds are strong, and receiving a lot of inflows.  Stocks are choppy, and losing their bid even when bonds are strong, so that high positive correlation of stocks and bonds moving together is breaking down in 2023.  We are now moving from an inflation focused regime to a growth focused regime.  Those regimes are dominated by negative correlations for stocks and bonds, as bonds like it when economic data is weaker than expected, but stocks don't, and vice versa when data is strong.  The bad economic data is good news for stocks regime is near its end.