Santoli: 'Is it still a bear market?' is a legitimate question after the recent upside follow-through

Published Thu, Aug 11 202212:46 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. A burst of upside follow-through that has taken the S & P 500 halfway back from its entire peak-to-trough decline makes "Is it still a bear market?" a legitimate and timely question. This is not about any arbitrary percentage gain off a low (yes the Nasdaq is up 20%+ but that's not the real standard) or simply the fact of recovering half the total losses. In practical terms, it's a question of whether investors can operate from the assumption that the June lows will hold if revisited, and risk appetites will normalize to make buying on pullbacks as prudent as selling rallies has been since January. Whether and when a bear market has ended is a debate and a process, not a declaration and a moment. The fact that the S & P 500 is still below a downward-trending 200-day moving average means by many lights it's still a bearish tape until these conditions turn. It's interesting the S & P is a couple percent short of the 200-day average but also right near a level of significant prior lows. This could define a new range one way or another. And, yes, in the near term the sprint higher on two days of relief over cooling inflation has looked a bit breathless and has stretched the tape a bit. But this does also happen at the start of lasting advances, so simply saying "we're overbought" is not the same as suggesting the market is set to roll over hard. The circles on the chart show prior times when the S & P's 14-day Relative Strength Index touched current levels. Some give-back wasn't far off in those cases. Some are still pointing to a similarly strong and ultimately doomed bear-market rally in spring 2001 – which likewise ran right up to the halfway point of the prior decline and looked similarly broad to this one. It failed badly, and the index sank to significantly lower new lows before bottoming more than a year and a half later. A softer-than-forecast PPI following Wednesday's flat CPI month over month adds credence to the idea that we're past peak inflation panic and the Fed is regaining some breathing room. Nothing has truly changed about the near-term policy path or the Fed's need to see multiple months of inflation moderation before stepping off the brake. But a "Fed pivot" that equities are trying to sniff out need not mean a quick U-turn from hiking to cutting next year. It can mean deceleration to smaller hikes and then a pause. In keep-it-simple terms, Wall Street was in a multimonth stagflation panic, worried in near-equal measures about the persistence of inflation and the risk of an economic stall/downturn. Jobs and inflation data over the past week eased anxiety on both the "stag" and the "flation" fronts. This is not a clinching argument, a recession might be imminent or even, in some fashion, underway. But good nominal GDP growth and moderating price pressures are, logically, being priced in. Markets do best when things are going from "bad" to "not as bad," let's recall. There's been a buying frenzy in corporate credit that has put in a nice spike on the chart of high-yield debt spreads, taking the spread down from stressed to pretty benign levels. Further signs the economy seems sturdier, especially at a time when companies and consumers are not particularly overburdened by debt. There's no doubt the rally has again made equity valuations seem less attractive. Noted Wednesday the average stock and small-caps look like better values than the overall S & P 500, but it's certainly fair to argue that there will be a valuation ceiling in place unless/until 2023 earnings estimates start to look believable not far from current levels. Market breadth has been great recently, by merely "good" Thursday, with 3:1 up:down volume on NYSE, a bit softer on Nasdaq. VIX clicks back above 20, maybe near a floor for now, but still in my mind not in itself "too low" for comfort as some are arguing.