I am currently of the belief that a major market bottom has most likely taken place. I first made the case for a new bull market in late October, and noted in December that conditions continued to improve. In this post, I will lay out my thesis that market conditions are becoming increasingly bullish, and that a major market bottom is most likely in.
Sentiment Bearish sentiment started to reach extreme levels this summer, and doom and gloom continues to proliferate. When we look at the chart below, we can clearly see that sentiment has reached levels that often coincide with a bottom. While this is by no means a standalone indicator, it is a step in the right direction.
Historical Precedents
Since 1926, the S&P 500 has returned an average return of around 12% a year. The chart below shows the worst years in history and the market's return the following year.
When we take out the 1930s, the returns are not only stronger, but the odds of an up year also drastically increase.
In addition, a proprietary indicator I track has also reached levels that often appear near major market bottoms. As shown in the chart below, when the indicator dips below the 4.5 level, a major turning point is often not too far away.
It's also interesting to note that William O'Neil once stated that most bear markets have three waves down, and we saw simliar action over the last year.
Accumulation On The Indexes
We've also seen some impressive action on the indexes recently. The Russell 2000 and IWO so far are acting a little stronger than the S&P500, but all three are above their 200-day moving averages, which is an excellent sign. The Nasdaq is a little bit weaker, but has shown signs of accumulation over the last few weeks.
Individual Stocks
Individual stocks have started to wake up was well, with CPRX, ALNY, TH, VRNA, and DAWN all showing positive action.
Solar continues to be an area of interest for me. FSLR looks like a true market leader, and the solar ETF TAN is setting up well in a big base as well.
Crypto
Crypto has most likely also put in a major bottom as well. It is quite possible that one day many will look back at 2022-2023 as an enormous opportunity to buy Bitcoin and Ether.
While I just laid a case for a bullish market in 2023, I'm by no means plowing in at this point. I've learned the hard way that it's better to take things slowly, one trade at a time. I've been wrong before and know I'll be wrong again. The key for me to is to have a thesis but to always keep an "empty mind" as Bruce Lee would say, and be open to the market's judgment. When push comes to shove, it's the only judgment that matters.
Risk right. Sit tight.
-Tom
To learn more about swing trading strategies, stock market trading, and how to trade cryptocurrencies, visit my course page.
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