Is the Bull Market Broken?

After a stellar rally since last November, the market is giving back some of the gains. There is a lot of bad news from around the world and inflation is refusing to give up. Should we panic already and sell? Let's look at the charts.

1. Let's not lose sight of the big picture. The market is still in the bull phase. The price (black line) is trading above the rising 150-day moving average (purple line). To bet against this longer-term trend, one must know something that no one else knows. That is very hard and risky to do. A study of long-term market trends suggests that you want to buy during long-term trends, not sell.

2. Short-term corrections are normal and they often end up being some of the best times to buy. Look what happen in Nov of 2023. The market looked scary at that time, but those who were brave enough to trust a long term-trend and buy enjoyed amazing results since.

3. What if this time is different and we are really seeing a major bear market unfolding before our eyes? Should we not sell now while prices are still good? The short answer is still no, even if we are at the beginning of another bear market (which I doubt seriously). Have a look at RSI (Relative Strength Index) reading. This indicator measures momentum. It fluctuates between 0 to 100, where a rating above 70 is considered to be overbought and a reading near or below 30 is considered to be oversold. The vertical lines indicate instances when RSI has been near 30 with correspondent market disposition. It is evident by just looking at the picture that you do not want to sell at exact moment when RSI is near 30. The market tends to rebound shortly thereafter and offers a better selling price. This works both in bear markets (red vertical lines) and, especially, in bull markets (blue vertical lines).

Given the evidence that the market is providing us, I would not recommend selling now, even if things get scary. In fact, I would put some cash to work if RSI gets even close to or below 30. I would wait for a rally and see if it sticks. If it does, then you will end up buying the dip and enhancing your future returns. On the other hand, if this rally fails to clear a previous high of about 5200-5300, I would be going more defensive at that time, but at a higher price. This works because the market is formed by sellers and buyers who constantly argue with one another. This is why the markets move in a zigzag fashion, as opposed to a straight line. In the darkest hour, there is often a bargain hunter who will step in and support a price. Even in the best bull market rally someone will spoil the party.