BEAR MARKET UPDATE: The stock market started 2023 with a flourish, with the S&P 500 and the Nasdaq composite back above their 50-day moving averages. Strong action has solidified the ongoing uptrend.
So, while the bear market may not be officially over, the stock market indeed has lost some of its bearish stripes.
IBD's outlook saw an upgrade from "correction" to "confirmed uptrend" on Jan. 6 as the Nasdaq and S&P 500 made strong follow-through days on the sixth and ninth days of their new rally attempts, respectively. During 2022, the prior several follow-through signals failed. But the Nasdaq composite has shown a series of follow-through days since Jan. 6, with big gains in higher volume. Action continues to improve so it makes sense to lift market exposure to 60% to 80%.
What was encouraging this week?
The major indexes avoided days of heavy distribution. Plus, declines have been mild. Therefore, investors should continue to build robust watchlists. You can find many of the stock market's future leaders while the indexes are still showing weakness.
As Thursday's Big Picture noted, the distribution count on the S&P 500 fell again. And despite Friday's reversal following a strong jobs report, a lack of volume means there was no further distribution.
This Week's Moves
Monday saw sellers come back into the market.
However, Nasdaq is doing something it hasn't done since the start of 2021: spending more than one day finishing above its 200-day moving average. This does not mean the trend has changed. But it's important to watch and see if the 200-day line changes course as well.
Meanwhile, the S&P 500 is also spending more time above its 200-day line and gaining ground past the 4000 level.
And both indexes finished quite strong Wednesday after the Federal Reserve raised its short-term interest rate by a quarter point to a range of 4.5%-4.75%. The central bank stayed true to its message, intent on raising rates but at a milder pace. The Nasdaq and S&P 500 extended those gains Thursday.
Futures trading monitored by the CME largely expects a quarter-point rise in the March meeting as well.
Fed Chair Jerome Powell said he's encouraged by a decline in inflation in recent months but will keep tightening. So, a resurgence in prices could wreck the bullish progress seen so far.
Investors Have New Opportunity
During a market correction, investors need to avoid buying stocks. But, with the market returning to confirmed uptrend status, now is a time to consider new buys. Focus on fundamentally-strong stocks coming out of sound chart patterns. It is key to keep your wits, given the challenging nature of the market. Stay disciplined and stick to time-tested buy and sell rules. See More Stock Market News
By definition, bear markets are always painful. Unlike in bull markets where most stocks go up in price, in a bear market, the fangs come out to drag most stocks down. In fact, history shows that three out of four stocks will decline during a bear market.
The silver lining is bear markets eventually set the stage for a robust new uptrend. Like a forest fire that wipes out the old trees to make room for new growth, bearish periods ultimately establish a new crop of stocks to buy and watch. And as that unfolds, such names will begin to pop up on stock lists like the IBD 50, Big Cap 20, Sector Leaders and IPO Leaders.
But as the bear market continues to play out, investors should focus on two key objectives. First, stay protected by learning when to sell stocks to cut losses and capture profits. Second, prepare to profit when the market turns around.
To do that, be sure to read The Big Picture and Market Pulse each day to track market trends and leading stocks. You can also monitor the latest action with Stock Market Today, updated multiple times throughout each trading day.
You'll also find coverage of economic news, industry trends and psychological market indicators to see what's happening in both bear and bull markets. Scroll down for more bear market basics.
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Analyzing Improving Market Conditions With A Follow-Through Day
What Is A Bear Market?
Wall Street defines a bear market as a decline of more than 20% from the previous high in the stock market indexes.
During a bear market, the headlines will focus on negative news, whether it's declining economic growth, geopolitical upheaval, cultural and legal turmoil, or some combination of all three.
That can wreak havoc on investors' portfolios as well as investor psychology.
While in a bear market, it's best to avoid buying stocks since most will follow the general market trend and head lower. But it's also important to avoid getting overly bearish and negative to the point where you ignore the stock market.
The market trend can turn around very quickly. In fact, the indexes often switch from a bear market to a bull market when the news is at its worst and the mood of investors is at its lowest point.
When it comes to investing in stocks, one of the biggest mistakes investors can make it throw in the towel right when we hit a bear market bottom and the indexes find support and start to surge.
Bear Market Vs. Intermediate Market Correction
The difference between a bear market and an intermediate correction is the depth of the decline. In a bear market, the indexes fall more than 20%. An intermediate market correction is defined as a shallower decline, typically of around 10% to 15%, but certainly less than 20%.
A bear market is a like a reset button. It wipes the slate clean and resets the base counts of all stocks.
After the market indexes have emerged from an extended downturn and made a substantial climb (known as the first leg up), at some point the market will pullback. A pullback of around 10% — 15% (i.e., less than 20%) is considered a normal market correction.
The best gains typically come from stock breakouts during the early stages of a bull market. Once the indexes have gone through multiple market corrections and stocks have formed multiple chart patterns, the underlying bull market starts to run out of steam. The indexes will become more volatile.
At some point, the decline will deepen enough to constitute a bear, and the cyclical process begins again.
How To Identify A Bear Market Bottom
At some point, a bear market will end and a new bull market will begin. But how can you tell when the market bottom has been reached? The key signal to look for is called a follow-through day.
Here's what to look for.
During a downturn or market correction, look for an attempted rally. Day 1 of an attempted rally begins when a major index closes up from the previous session. Neither volume nor the size of the gain matters. The only thing that matters is that the attempted rally stays alive. For the attempted rally to stay alive, the index cannot undercut the low of Day 1.
On Day 4 or later of the still-intact attempted rally, the Nasdaq or S&P 500 must deliver a strong gain in volume up from the previous day. That big gain in rising volume is the follow-through day. It confirms that a new uptrend is underway.
While not all follow-through days lead to a sustained new uptrend, no bull market has ever begun without one. So rather than try to predict when the indexes will find a bear market bottom, wait for this key signal to appear.
It's a sign to start getting back into the market gradually — not all at once. If the uptrend holds and growth stocks gain traction, you can begin to invest in stocks more aggressively.
