Why The latest Bounce In The Market May Not Last

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Could we go up? Could we go down? Could we go down further than before? This is to try and answer why the latest bounce in the market may not last.  Or could it?

Post difficulty – Harder

The Results

Let’s start with the positives! 

July and August (so far) have been wonderful.  The markets have recovered a certain amount of the year’s losses, and there seems to be more money flowing in. Here’s the results:

  • S&P in the US is up roughly 13% since its lows in June.
  • NASDAQ in the US is up roughly 20% since its lows in June.
  • FTSE in the UK is up roughly 7% since its lows in March.
  • CAC in France is up roughly 15% since its lows in July.
  • DAX in Germany is up roughly 13% since its lows in July.

Not too bad for a bear market! 

But is it too good to be true…

Bear Market Rally; FOMO?

I wrote in one of my last posts about what a bear market is and about a bear market rally.  I won’t go into detail on the bear market part again, just head over to the other post for all of that info.

I do want to go back over the bear market rally part though, as this could be cause for concern.

During a bear market we get something called a fake breakout, it’s where the markets recover somewhat for a short period of time only to drop back down again.  The increase is usually down to a little optimism creeping in, and largely down to FOMO (fear of missing out).

As investors we all want to see our portfolios increase, and it’s natural human behaviour to get more optimistic as this happens.  

If you were looking at the results above, I’m sure you’d think now is the time to get back in. 

Markets are going up, and nobody wants to miss out on the recovery. FOMO my friends, FOMO.

If a lot of people have FOMO, guess what, it pushes those results higher, creating more FOMO, meaning more money coming in. 

However, are we not forgetting why the markets dropped originally?

This is where fake breakouts happen, people are optimistic investing further and building markets up. They start to forget about the reasons the markets are down and the recent lows that have happened. Then like a wave crashing down, the reality of what’s happening washes over you. Investors lose confidence and markets start to drop again.

Don’t Get Carried Away

So, could the latest bounce be a fake breakout?

Quite simply, yes, it could! 

Could the latest bounce be the end of the bear market?

Yes, it could! 

As always with investing, nobody has a crystal ball. 

What we do know is that the causes for the drop during this year haven’t disappeared. Inflation is still high, there is still war in Ukraine, interest rates are still going up, supply chain issues are still a problem, government debts are still high.

With all of this going on, it’s important to not get carried away! If you’re trying to be tactical about when, where and how much you invest, then now is still time for caution.  This could be a fake breakout/a bear market rally, after-all, the reasons we were down originally are still here.

The Charts That Matter 

If you’ve read my other investment posts, you’ll know that I like using charts. They’re a great way to explain and show what’s happening.  Here is no different:

The above chart shows the NASDAQ in the US, the green bars are the up days, and the red bars are the down days, the blue lines are 2 trend lines that I have placed on the chart.

The top blue line shows a clear resistance line where the price reaches and then falls back down. It happened originally at the start of January and then again at the end of March. Just recently, in the past few days, we have reached that line again. If this line holds up as resistance and the prices aren’t able to reach beyond, then we are likely to see another drop as confidence wanes. 

If another drop does occur then the bottom blue line may come into play. It’s been a strong down trend line meeting at many points. If market prices reach this line, then it would be a substantial loss from the current peak. 

Alternatively, any drop may hit this horizontal line. As you can see the prices have hovered around this line quite often so it might help to support the price. If we drop and hit this line and don’t drop further, then I expect we’ll probably end up going up and down between 11600 and 12800 for a while.

The S&P, CAC, and DAX all follow a similar pattern:

The UK likes to be different and is just trading sideways, as usual. 

Why The Latest Bounce In The Market May Not Last

There seems to be a strong case that the most recent bounce in the markets may not last. The global issues haven’t changed and central banks are unlikely to start reducing interest rates all of sudden. Markets have hit previous trend lines highs, and may find some resistance persistently pushing past them. This could mean a further drop to find a new low or a drop to find some level of maintenance that will persist for some time.

There is a possibility that it could be an upward trajectory from here. Any good news that comes out regarding the issues stated above will surely help this outcome. 

However, now is still a time for caution and be prepared that this may be a fake.