Bottom Bouncing. What Happens After Act of War and the First Rate Hike.

Market bottoms usually occur after there have been two lows around six to
eight weeks apart. On rare occasions, stocks have had to make a triple bottom
to exhaust the selling pressure. That may be what is happening this year. The

YTD chart below shows the ETF representing the S&P 400 Mid Cap Index has hit
the low point reached this week for the third time this year. The first time was on
January 24th, the second time was March 7th and the third time was yesterday. The
period from January 24th to March 7th was six weeks apart. The period from
March 7th to April 27th is seven weeks apart.

The chart of the S&P 500 below shows the lows on these dates as well. For the
S&P 500, the low on March 7th was close to 6% lower than the January 24th low.
A successful double bottom has lows that are usually within 4% of the previous
lows. The lows on March 7th and yesterday were almost at identical levels.

This chart of the ETF representing the NASDAQ 100 shows a pattern similar
to the S&P 500. The lows for these technology companies was noticeably lower
on March 7th compared to January 24th. However, the lows yesterday were also
almost identical to the March 7th low. The S&P 400 rose 1.87% today, while the
S&P 500 gained 2.47%. The NASDAQ produced a 3.06% boost. Today was a
critical test for stocks to show if they can hold the March 7th lows. If they can,
this would likely complete a successful bottoming process that has exhausted the
selling. The strong rebound today was a very positive reaction to dropping down
to the previous low on March 7th.

The financial sector is very influential. The chart on the next page shows that
the ETF representing the US Banking Index (BKX) continues to make lower
lows. The low yesterday was 6.7% below the March 7th low. This ETF gained
1.25% today, which was okay but not impressive.

 

These charts were produced from data supplied by WSJ.

 

The oscillator for BKX below is now at the lowest level since 2008, suggesting
that the worst-case scenario has been factored into current prices. However, the
white line needs to turn up to indicate that the downtrend is reversing. That is not
happening yet but can now occur at anytime.

Oil prices rose more than 80% in a 12-month period as of last year so the S&P
500 usually falls at least 20% within 18 months or so after that happens. Markets
are down close to 15% now. Stock markets fell 33% after Covid swept across the

the globe in 2020. In the other two occasions when stocks fell 20% in the last
seven years, the S&P 500 only stayed down at that level for minutes before
turning around on a dime. If stock prices are going to fall another 5% to reach the
20% level, it would likely be a very quick violent affair that could be over in a
matter of days. Keep in mind that there are enormous amounts of cash,
corporations are waiting to use, to buyback their own shares as soon as they think
stock prices will be back on the upswing. As mentioned last week, hedge funds
also have a huge proportion of cash that they cannot keep there too long if they
want to meet their clients’ objectives.

 

What Happens to Stocks After The First Rate Hike?

 

Rising interest rates are not the death knell for stock markets like some may
think. The chart below shows how the S&P 500 has performed 36 months after
the first interest rate hike. The dotted lines show what happened when there was a
recession and when there was not a recession. The dotted yellow line is the
median case. The worst-case scenario occurred in 1973 when stocks were in a
consolidation phase. The yield curve had inverted then and oil prices had also
risen 80% in the previous 12 months so that was a perfect storm. Now stocks are
in a growth phase but oil prices have spiked higher.

 

What Happens To Stocks After A War Begins?

The following chart shows how the DJIA had performed 1,000 days, or close to
three years after an act of war has begun. There have been 29 instances where this
has happened since 1941. The median return has been 22.1%. Once again we must
remember that we are ten years or so into a 16 to 18-year growth cycle when
stocks perform much better than average.

In summary, stocks are once again testing the previous lows, trying to complete
the typical double bottoming process. The test was passed successfully today but it
will be important to see what type of follow through there will be. It would make a
big difference if the financial sector could reverse its downtrend.

What has happened in the past shows that rising interest rates are not usually
negative for stock prices. An inverted yield curve is what causes recessions and
bear markets, not merely rate hikes on their own.

While wars and invasions are tragic, destructive events, history shows that acts
of war do not usually have a negative impact on stocks either. Other factors like an
inverted yield curve, an 80% rise in oil prices in 12 months and whether stocks are
in a consolidation phase or growth phase typically have much more of an
influence on stock prices than an act of war or an interest rate hike.

In the meantime, I will be monitoring how stocks react to testing the previous
lows and what sort of follow through there is when a rebound occurs. Prices could
fall further and if they do, it could happen quickly and reverse just as quickly.
With two to three previous lows and two key reversal days already in place seven
weeks apart, what is happening in the markets suggest this bottoming process
should be over sometime within the next 30 days if it is not over already.

 

Easter at the Harders'

 

I remember going to visit some people with my parents when I was very young
and there was nothing to do there. So, I vowed at that time that no child would
ever come to my place and feel like that. We had more than 40 people on my
wife’s side over for Easter Sunday and it was perfect weather for Easter egg
hunts, time on the swings, glides on the zip line and hay wagon rides behind the
tractor. It was so nice to be able to meet together again for the first time in two
years due to Covid. Have wonderful weekend my friend!