Its Back
Igor Manukhov - May 16, 2025
Time to look for opportunities but be patient.
As I write this article, the market is back above it’s 200-day moving average (the black line is above the blue line on the chart). This is one of the strongest comebacks in market history. A few weeks ago, I noted that the rally is credible because several indicators, such as rally participation and high-yield bond spreads, were moving in the right direction as prices increased. The only holdout was the ratio between discretionary and staples stocks. Ideally, discretionary stocks should outperform staples during a rally. After some initial hesitation, this is finally happening (note how the red line has begun rising at the bottom of the chart). That is great to see.
Since 1956, there have been 18 bear markets (20%+ drops). 16 of them featured a W-shape recovery, meaning that after the initial selloff, the market experienced a relief rally, then retested or even dipped below the previous low before ultimately recovering. Notable examples include the 2008 and 2022 bear markets. Only two times over the last 70 years has the market recovered in a V-shape (2018, 2020), where it rebounded without revisiting the previous low. Based on the factors outlined above, 2025 could become the third.
Despite these positives, the market is getting quite overbought on the short-term basis, based on RSI readings (middle panel). When RSI indicator approaches 70, it is best to wait for a pullback before buying. I have marked some of the previous occurrences with vertical purple lines.
Overall, a very positive picture, but we just need to be patient and stick to the process.
