They are of a different character than typical bull market rallies and have these traits in common:

  • Gigantic in magnitude
  • Late-cycle, early in a downtrend
  • Extremely elevated sentiment (chest-pounding from bulls totally convinced we aren’t going lower- as an aside this is also true during bull markets, so it’s important to consider the other factors as well, but in a bear market rally the sentiment is of a different nature because it's born from an initial sense of fear and so it has a major "phew/relief/euphoric" flavor to it like you might feel after you survived your first skydive, except in this case you don't realize you haven't touched ground yet)


The rally we saw this week from Tuesday through Thursday that took the Nasdaq-100 up more than 5% is more evidence of a bear market than not. Yes, that’s right. Not buying this rally either. People often cite the 9-1 or double 8-2 up days as bullish indicators but I believe these only have relevance if you are in a solid uptrend in all indices and preferably early cycle with depressed sentiment. At the current stage of the cycle I believe they carry much less weight.

Bear market rallies occur because when bull markets end there is always a period of great uncertainty. Bears are unsure if it will culminate in a major slide while bulls hope it’s just a buyable dip. So there are these pockets of calm as the selling unfolds where a contingent of those bulls who didn’t see a sell-off coming and got trapped in the first one or two and hoped for a resumption of the bull market is now convinced it’s yet another buying opportunity. Then the selling stops for a day or two or three, and in this pocket of calm like the eye of a hurricane passing over, the bulls rush back in and drive prices up almost vertically.

The trapped bulls now have no impulse to get out and miss the continuation of the bull market and this massive rally only further reinforces the bulls’ bias towards the market. This is evidenced from the resurgence in bullish rhetoric and football spiking on the bears. Then a day or two later the selling inexplicably continues and the bulls get battered again. Rinse and repeat.

Eventually the bottom falls out and the market collapses and real fear, not the horse shit sentiment readings like the NAAIM and CNN Fear and Greed Index takes hold and nobody wants to touch risky assets. Then you may be closer to a bottom. We ain’t there yet. Not even close. There are just way too many permabulls convinced of their genius at this stage for me to buy it.

This market is very mixed despite all of the bullish rhetoric. Breadth has not returned and now money is extremely concentrated in a small basket of stocks which just happens to be what the S&P tracks and the S&P is what everyone follows so it has everyone masked from the extreme volatility happening beneath the surface.

Actually, that’s a bit disingenuous. There’s been a lot of commentary noting that underlying volatility, but most view it as bullish rather than worrisome because they think that the selling in those high beta stocks has likely bottomed and now everything will resume the uptrend. If the megacaps give way the entire market is going to come down and in a terrifying way. I don’t think anyone is really considering the amount of risk present right now given how heavily concentrated the average person’s wealth is in a few extremely expensive risk assets. I think we need a reminder that as iron-clad as Apple and Microsoft seem to be, they are risky assets. And despite the consensus view that they are cheap, they are not.

Let’s not overcomplicate this. My read on the market hasn’t changed. The recent weakness is all about the Fed. The market weakened significantly after the November FOMC and has not recovered. It got even weaker after the December meeting where a doubling of the taper was announced with rate hikes coming as soon as March. Every other narrative is a sideshow and while it’s possible we can regain some upside in the interim, I expect selling to resume soon. The constant spikes in price are a necessary ingredient of any lasting sell off.

Every market cycle is different and in this cycle I truly believe you need a resilient market during the slide to keep people in. In a way, if the market just sold off 20% it would be too easy because it would make everyone bearish at once and nobody would get drawn back in during the drop.

It seems easy to say that every dip over the past few years was a great buying opportunity. But the reality is that in Febrary of 2018, a 10% slide was enough to terrify people out of stocks. In December of 2018 it took a 20% drop over a few months. There is no such reluctance to buy risk assets currently so we know it’s going to take more than what we’ve seen to this point. The idea that we have a bottom because of what’s happened to the ARKK stocks is laughable. Yes, there is real fear in everyone else. You escaped unscathed, sir. As I like to point out regularly, real fear is achieved when everyone is terrified, bulls and bears, and for completely legitimate reasons.

The question you should always ask yourself if you’re trying to call a market top is, what is going to make people shun risk assets enough to miss out on the next bull market? When trying to spot a bottom you have to look for a complete reluctance to trust stocks or risk assets of any kind. You yourself as the oh so wise bear should feel some palpable nervousness too. No, you aren’t immune or better than anyone else and you too will probably be afraid to buy when an actual bottom is in. Best to just accept that reality. Cash goes from being trash to being the most valuable asset.