Investors are nervous right now. The percentage of retail investors who are bullish, as measured by American Association of Individual Investors (AAII) polls, has been below 25 per cent for three consecutive weeks.
As for fund managers, a large majority think the advance since October 2022 is just a bear market rally, according to last month’s Bank of America fund manager survey.
However, despite last week’s bloodletting, there is some consolation for trend followers. The S&P 500 rose above its 200-day moving average in January and remained above it until last week. That’s bullish – since 1950, says Spectra Markets’ Brent Donnelly, there was only one bear market (in 2001) where stocks rose above their 200-day average only to subsequently make new lows. Even then, the index was only above its 200-day average for 18 days, less than half the recent streak.
Similarly, Bespoke Investment found 12 previous bear markets where stocks rose and stayed above their 200-day average for at least four weeks. A year later, stocks were higher every time, gaining an average of 20 per cent.
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“The 200-day is a pretty good indicator for trend following in bear markets,” says Donnelly. “This is not what a normal bear market looks like.”
