In Bear Market, Leader Stocks Tends Bottom Before Indexes
Key Points
1. The indexes may lead to hitthe bottom of before the CPI hit.
2. In Bear Markets, leaders tend to bottom before the indices do.
Inflation jumped to 9.1% in June on a persistent climb in gas, food and rentcosts, notching another 40-year high and likely solidifying the Federal Reserve’s plans for another big rate hikethis month, this in turn puts pressure on U.S. stocks.
According to the experience of the great inflation in the 1970s, the index may lead to hit the bottom of before the CPI.
For example, in the great inflation of the United States in 1974, the CPI peaked at the end of 1974, while the S&P 500 bottomed out and rebounded 3 months earlier.
From 1979 to 1980, U.S. inflation, the CPI peak exceeded 1974, but the trend of U.S. stocks completely ignored the CPI data and walked out of a slow bull, showing the characteristics that the stock market will not price the same event twice:
White line: S&P 500, Blue line: CPI
Before the CPI was released on Tuesday, commodities had already retreated sharply. Copper $Copper - main 2209(HGmain)$ futures plummeted and $Light Crude Oil - main 2208(CLmain)$ once fell below $100. The main reason for the decline was that the market was worried about an economic recession and the corresponding demand declined.
White Line: Copper Price, Blue Line: Oil Price
If the commodities prices trend continues, the CPI is expected to fall in July. As a result, the stock market may hit bottom earlier than CPI again!
Judging from the price-earnings ratio of the $NASDAQ(.IXIC)$ index,the valuation has fallen back to the historical average, and the earnings season will come next.
The earnings outlook for the quarter 2 can allow investors to observe the extent of the economic recession. At that time, US stocks may choose a direction.
From the market's reaction pespective, we can see growth stocks holding steady today despite super hot CPI print and many names now green. Growth stocks usually bottom before the market indexes.
In Bear Markets, leaders tend to bottom before the indices do.
In the Dot Com Bust of '00-02, it took nearly 31 months for the Nasdaq to fully bottom. Leaders began bottoming 12-24 months into their respective declines, while the index still had 1-2 waves down remaining.
In June when the indices declined to fresh bear-market lows, most growth stocks stayed above their spring lows. Over the past few months, they have carved out higher lows (or double bottoms) and some have now also climbed above their recent highs.
For example, David Marlin noted：Not all stocks bottom at the same time. When you go back and study previous Bear Market bottoms, this becomes even more evident. The tide seems to be turning. The Dot Com Bust, in particular, has been a great study throughout this Bear. $Amazon.com(AMZN)$ ,$Microsoft(MSFT)$ ,$eBay(EBAY)$ ,$Intuit(INTU)$ saw bottom up with different weeks before NASDAQ bottom.
So market's reaction is more important than the news though.
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Great article