The market is at a pivotal point as Nasdaq Composite has brush with bear market

Published Tue, Mar 8 20224:13 PM ESTUpdated Tue, Mar 8 20225:27 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Nasdaq's brush with bear market territory this week comes at a pivotal time, and it may take awhile before it's clear whether other indices could also be in for a 20% decline. The Nasdaq Composite closed down Monday at 12,830.96 and in bear territory at the close for the first time since 2020. A 20% decline from its 52-week highs is considered a bear market only if the index stays there. After wild trading on Tuesday, the index closed at 12,795.55 and down 20.3% from its record close. According to Bespoke, true Nasdaq bear markets typically last an average of 225 calendar days and see a decline of 30% to 35%. It took the tech-heavy index 108 days to reach a 20% decline this time, six days longer than average, but the question is whether it holds below that level. In earlier bear markets Bespoke has studied since 1971, the Nasdaq touched its low an average 123 days later. On average, the index was up 13.3% a year later and was positive 76% of the time. The last time the Nasdaq fell more than 20% for any length of time was during the pandemic. The decline, however, lasted just 33 days, starting in February 2020. Katie Stockton, founder of Fairlead Strategies, said she judges a bear market by not only the size of the decline but the duration. Right now, she still sees the Nasdaq in a correction. "The Covid correction was 30%, and no one called that a bear market because it was so fast," said Stockton. "People label it this way in real time, but it's premature to call it that. It doesn't mean it can't happen. What would increase the likelihood is a significant breakdown, but we don't have this. It's still a corrective phase." Stockton said she watches the Nasdaq 100 . Two key levels for that index are 13,200 and then a retracement level at 12,950. Below that would be a breakdown. Strategists say the S & P 500 could follow the Nasdaq lower. "The Nasdaq is a leading indicator of where we are in a complicated environment," said Scott Redler, chief strategic officer with T3Live.com. "Commodities names and energy names hold up other indices, giving us a false sense of security. But overall, today's actions show how non-committed the bulls and the bears are in a very volatile market with a lot of unknowns." He said the drop could be around 20% in the S & P 500. "I personally think the S & P gets to the 4,000 level or below," said Redler. The S & P 500 ended Tuesday down 0.7% at 4,170, and is now 13.5% from its high. Redler said he is watching the PowerShares QQQ Trust ETF, which is based on the Nasdaq 100, to see if it holds its February low of 318. So far, it has. "A few things could happen. We hold here and have a feeble bounce. If we have a feeble bounce, it raises the probability of breaking 318," he said. "You could hold 318 and have a fast and furious bounce, which it maybe could correlate to some kind of correction in oil. On a micro level, it feels weak, like it should hold, but it doesn't mean that's the low for 2022." Sam Stovall, CFRA chief investment strategist, said he expects the S & P 500 and the Nasdaq will both head lower, and the S & P could touch a bear market of its own. He said if the S & P 500 falls to a key retracement level, it would be down just over 20%. "If the S & P were to retrace the gain from March 23, 2020 until the Jan. 3, 2022 high, if we had the 38.2% retracement level, the S & P would be minus 20.4%," he said. Stovall said the key technical retracement coincides with the same level the S & P 500 would be at if it were trading at its long-time average price to earnings multiple of 17 times 12-months forward earnings. That level is around 3,800.

The Nasdaq MarketSite in New York.

Michael Nagle | Bloomberg | Getty Images

Nasdaq's brush with bear market territory this week comes at a pivotal time, and it may take awhile before it's clear whether other indices could also be in for a 20% decline.