The stock market never works the way we think it should. When the news stories are bleak, we tend to think the stock market must react negatively. But that's not the way things work. Most times, the stock market bottoms LONG BEFORE we see any positive developments in the fundamentals. Let me give you a perfect example and one that reminds me a LOT of today's market action:
1990-1991 Persian Gulf War
The Persian Gulf War was just one of a number of problems during that time period. Similar to today, crude oil prices ($WTIC) soared 147% from $17 per barrel to $42 per barrel in a very short period of time - from July through September 1990. There was also a recession that lasted from July 1990 through March 1991, mostly as the result of restrictive Federal Reserve policy in 1989 and 1990 to fight inflation. Oh, and we had just recovered over the prior 2-3 years from a dramatic market drop - the 1987 market crash.
Does this all sound familiar?
During the 3rd quarter of 1990, the S&P 500 fell just over 20%, resulting in a cyclical bear market. But while the war and the recession lasted well into 1991, the stock market bottomed long before in early-October 1990:
The red-shaded area represents the timing of 1990-1991 recession. The dotted vertical lines mark the beginning and end of the Persian Gulf War. Note when the market bottom occurred - well before either of the other two ended. So if you ever wonder, "how can the stock market move higher with so much bad news out there?", just remember that the stock market looks ahead. Wall Street sees things that we can't see. It looks beyond the current troubles, many of which will go away over time.
Currently, we see crude oil soaring, a major conflict in Eastern Europe, and a determined Fed that's begun its fight against inflation and plans to continue hiking interest rates throughout 2022 and into 2023. It's all occurring within 2 years of a major market decline that resulted from the 2020 pandemic. It sounds a lot like 1990, doesn't it? So how could the stock market possibly have bottomed with its February low? While I'm not convinced it has, I certainly realize that it's quite possible, because that's how the stock market works. Bottoms do not occur when media outlets start reporting good news. First of all, they don't report good news as their viewers/readers will drop by a half to two-thirds. Bad news sells, so we'll continue seeing terribly negative headlines. If you want to see or anticipate the bottom, stick with the charts.
In tomorrow morning's EB Digest, our FREE newsletter, I'm providing an S&P 500 chart to help illustrate what I believe is going to happen in the coming days and weeks based on key technical price levels. If you'd like to join our growing EB community and receive this S&P 500 chart tomorrow, simply provide your name and email address HERE. There's no credit card required and you may unsubscribe at any time. We'll keep your information private as well, never providing your information to third parties.
Happy trading!
Tom
