Market Slice: This is What a Bear Market Rally Looks Like


Note to Market Slice Readers: 

This week’s stock market rally brought new recent highs in the NASDAQ, the S&P, and the Dow. Conventional opinion held that all the bad news – low earnings reports, continued high inflation, and the forthcoming increase in the Fed funds rate for instance – had all been discounted into current pricing. With the consensus being that whatever happens next is bound to be a positive for the market, investors rushed on Tuesday to put “risk on,” creating a strong bullish sentiment in the midst of a continuing bear market. To put this into perspective, let’s take a look at rallies that unfolded during past bear markets.

Source: Michael Kantro. Chart courtesy of

As we can see, and to no one’s surprise, both the dotcom crash and the Global Financial Crisis bear markets were punctuated by several upturns. These “bear market rallies” were frequently hailed as “the end of the bear market,” but turned out to be only temporary respites. Now, what about the Bear Market of ’22?

Source: Michael Kantro. Chart courtesy of

Even with this week’s rally, the S&P, which closed Tuesday at 3,936, has a long way to go to take out the early June high of around 4,200. And even if it should continue to that point, we might note that “Rally #2,” back in March, moved past the resistance formed by “Rally #1” … but then declined by over 700 points through May. Mr. Kantro’s conclusion is that this is unlikely to be the bottom. While “permabulls” will surely proclaim it to be “the end of the bear,” there are several reasons to doubt this.

Chart courtesy of Source: FactSet
  1. Corporate earnings are still sluggish, and expectations are in the tank. The chart above appeared in Monday’s Market Ear under the headline Earnings Sentiment Collapsing. This shows lower earnings mean lower share prices, and earnings sentiment remains cautious at best. There is little comfort for bulls in this department.
  2. Despite signs of an economic slowdown, inflation remains high. Upward pressure on wages, simmering labor unrest, and ongoing supply issues undermine any prospects for recovery, and consumers are giving signs of reining in spending. In short, the fundamental requirements for a quick economic turnaround are not present.
  3. And then there are the multiple “black swans” – unanticipated negative events – that we’ve been highlighting for months as potential daggers pointing at the heart of the domestic economy. From renewed COVID fears to global tensions to China’s unresolved real estate debt crisis, there are numerous factors leading us to agree with Mr. Kantro that this is unlikely top be the bottom of this year’s market decline.

This bear market rally comes as no surprise to prepared investors. Just two weeks ago we wrote “With the Fear and Greed Index still in ‘Extreme Fear,’ we tend to expect the short-term direction is, if not up, at least sideways.” As we often point out, your short-term trading outlook does not have to conform to your longer-range macro view. You just need to keep the big picture in mind when you trade.


Energy and Food

Two commodity groups hold vital significance for the economy. Energy and food are the most essential ingredients in economic well-being. Energy is a resource that all other economic activity depends on, and food is vital because if people don’t eat, they can’t produce! While food and energy prices have retreated a bit lately, these pullbacks have not yet been reflected at the retail level. This chart shows the Bloomberg Commodity Index (blue line) against the Consumer Food Price Index (white line).

Chart courtesy of Source: Macrobond

If commodity prices remain in a downward trend, it should show up as lower grocery bills for American families later in 2022. This is one of the disinflationary indicators potentially pointing away from runaway high inflation in the months ahead.

Oil slumped over the last several trading sessions, but then rallied back above $100 a barrel on Tuesday. As we pointed out last week, even with this recent dip, oil prices remain near 10-year highs. While we have seen a more than 15% decline from the highs in mid-June, these tenaciously high prices – and their reflection at the gas pump, where Americans feel energy costs most directly – continue to put inflationary pressure on the economy.

Market Ear shared this interesting take from Bloomberg commentator Vincent Cignarella earlier this week:

Gas prices have been a major factor for the increase in CPI, but when prices dipped inflation remained stubbornly high.
The reason was the constant increase in the cost of food and beverages. For stocks to really reverse the current downtrend, food and beverage prices need to drop in order for the consumer to continue to spend.

When gas prices surge many of us can try to cut back on driving to save some money but it is far more difficult to cut back on feeding one’s family regardless of price. The answer to inflation will have to come from somewhere else, instead of blaming Ukraine.

Gas prices began to rise almost a year before Russia invaded the country as did the price of food and beverages. Both began to climb in after March of 2020 when the economy was flooded with federal spending.

“Oil Prices Blamed For Inflation When The Driver Is Really Food” – By Vincent Cignarella, Bloomberg Markets

The food and energy squeeze is heightened by the continuing crisis in Europe as a result of Russia’s invasion of Ukraine and retaliatory Western sanctions. We will have more to say on this next week, but for now suffice to say that until food and energy prices show real decreases, the prospects for lower price inflation remain poor.


The Schizophrenic Dollar

When inflation goes up, the value of the dollar is supposed to go down… it’s basic economics. By definition, inflation means the currency is worth less… it takes more units of currency (dollars) to buy the same amount of goods.  So why is the dollar near 20-year highs when inflation is over 9%?

The inimitable Peter Schiff has a lucid answer. The article is available on his site, and it’s well worth reading. You can also hear Mr. Schiff break it all down on his podcast here. Although space does not allow us to go through his entire argument, here’s the gist of it. The dollar is very weak domestically. It’s not so much a matter of prices going up in real terms as the dollar going down. We have trillions more dollars floating around in the economy than even a few years ago. This is the devaluation of the dollar that gold bugs are hard money advocates have been insisting is the inevitable result of our profligate monetary and fiscal policies. But while the dollar is losing value at home, it’s gaining value relative to other currencies. It’s not so much that the dollar is strong, it’s just that every other currency in the world is weaker. The dollar is what Schiff calls “the cleanest shirt in the hamper.”

Schiff observes that:

“Right now, the dollar is acting as an inflation hedge for everybody outside of the United States. It’s not an inflation hedge inside the United States. You can’t buy the dollar to hedge inflation if you’re an American living in the US because there’s no hedge. The dollar is losing value. … That’s not the dynamic that Europeans are looking at, or the Japanese. From their perspective, yields in the US are very positive because they’re looking at the appreciation of the US dollar.”

While Schiff focuses on the speculative reasons for foreign investment in the U.S. Dollar, it also makes sense to consider the “flight to safety” factor, as global investors continue to view the greenback as the most secure place to park assets in times of extreme financial uncertainty.

The bottom line is that there is an irreconcilable difference between the U.S. Dollar’s role as a domestic currency, and its use as an international investment vehicle. Something has got to give… either the dollar will strengthen and inflation will abate, or international investors will realize that the dollar is structurally weak, and shift their assets into better stores of value. Gold and crypto investors are confident it will be the latter, and those asset classes are about to experience a rebound. What do you think?


Trust Us, We’re Lying

Finally, there’s this item from Statista:

Confidence in the media has sunk to a new low in the U.S., according to a recent survey by Gallup. Trust has been largely on the decline for more than thirty years, but has plummeted five percentage points since last year.

Television news seems to muster up particularly low confidence, with only 11 percent of U.S. survey respondents saying they had a “great deal” or “quite a lot of” confidence in the medium in June 2022, versus four percent that had no trust at all. Newspapers fared a little better, although still poorly, with 16 percent of people having confidence in it as a news source, and three percent without trust.

According to Gallup, the majority of Americans would say the media fails to report the news “fully, accurately and fairly” and that newspaper and TV reporters are not highly ethical.

Not surprised. The only thing we’re wondering is what in the world are those 16% and 11% thinking? And by the way, what’s Jim Kramer’s rating?

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