DEEP DIVE: The Tug-Of-War Continues Between the Bulls & The Bears

The latest bear market started on January 3, 2022, when the S&P 500 peaked at a record-high 4796.56. That’s undisputable. But whether the bear market ended on June 16 at a closing low of 3666.77 is a question of great dispute. The bulls, including Joe and me, think so. The bears believe that the bear market isn’t over and that new lows are ahead.

The bears were on the defensive from Thursday, June 16 through Tuesday, August 16; over those two months, the S&P 500 rallied 17.4% to 4305. But the rally wasn’t robust enough to breach the index’s 200-day moving average, which was 4306 on Friday (Fig. 1). The S&P 500 stock price index relative to its 200-dma bottomed at a 26-month low of -17.1% on June 16 and rose to -0.2% on August 16 (Fig. 2). It closed at -3.8% on Monday.

Now let’s review why the bulls enjoyed such a good bull run from mid-June through mid-August and then consider why the bears might have a good bear run for a few weeks:

(1) There were mounting signs this summer that inflation might be peaking and doing so within the context of a soft, rather than hard, landing of the economy. The major commodity price indexes peaked in mid-June, led by energy (especially gasoline) and agricultural (especially grain) commodities (Fig. 3 and Fig. 4). An easing of price inflation would lift consumers’ purchasing power at a time that payroll employment has been rising; it jumped by 926,000 during June and July.