In this article:

• Caution calling end of bear stock market
• Traders adapt to data, market shifts
• ‘Outperformers’ offer trade setups

The bulls seem winded.

After a sharp spike higher on Wednesday, an early sprint to the upside Thursday morning faded like a marathoner who missed the energy drink stand.

All three major indexes sputtered through the stock market open session today, and only one crossed into the green at the close.

Bulls Lose Steam In Bear Stock Market

This stock market race just keeps adding twists and turns.

In the market today, the Dow closed at 33,336.67 points to eke out a .08% gain (adding just 27.16 points on the day). The Nasdaq dropped to 12,779.91 points for a .58% stumble while the S&P 500 missed moving higher, losing .07% to 4,207.27 points.

Closing numbers today were much weaker than the surge higher in the Wednesday session.

Moves higher this week have some analysts and traders marking this as turning the corner from a bear to a bull market.

The caution to observe at this juncture may be the gap higher early Wednesday that consolidated through the close with little movement higher. The pop Thursday morning followed by the market struggling to stay positive begs the question of, “Just how strong is this move higher, this ‘bull run.’”

Likely not as strong as many traders are hoping.

The rally Wednesday in the Nasdaq marked a 20% run higher from the June 16 closing low. Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading, pointed out that this could be an early signal the Nasdaq bear market status is ending.

But the transition from bear to bull market isn’t always clear, especially when caught up in the market volatility.

U.S. Consumer Price Index (CPI) numbers released before market open on Wednesday – while only down .6% – sent the market spiking higher across all three major indexes.

The CPI climbed by 8.5% in July, less than forecasts and down from 9.1% the previous month. Despite the lagging numbers, inflation remains at 40-year highs.

A continued drop in inflation could provide energy to the bull market momentum.

A faltering performance in the open session today fuels suspicion that a sustained bull run really is underway.

Mary Ellen pointed out two historical dates that offer caution.

Market data shows that in January, 2001, and December, 2008 – each marking three months after a “clinical” bear market ended – there were deep market losses. Mary Ellen noted that these were failed “follow-through” day attempts where the market had another leg down before

turning bullish.

The market this year so far has had intermittent runs higher off lows and then moved down again. As an example, the S&P 500 (ES) E-mini futures hit an all-time high to start 2022. It then steadily fell off that high and continued lower through mid-June before its current uptick. This was a downtrend from 4,800 to 3,600.

Despite moving higher to date, the ES is still well below the January high, sitting just above 4,200.

For traders, this up-and-down market has proven tricky. In the past few sessions expectations of lower price action were met with bounces higher and vice versa.

Adapt to data releases, market shifts

Continued challenges for traders have been the regular updates and changes in data such as Federal Reserve (Fed) interest rate plans, economic reports, inflation numbers, etc.

Bruce Marshall, Senior Director of Options and Income Trading at Simpler Trading, still holds that this market is vulnerable to the downside with a good deal of risk despite calls for a near-term bull market run.

Stock charts across the board are showing extended levels and could set off a hard pullback.

Or maybe not – something traders don’t want to hear in this sly market.

“We could go either way,” Bruce said. “It’s a big, giant question mark.”

This market appears to be teetering every day on the shock level of the next data release. Any “expected” data could fuel buying and any “unwanted” data could push the market lower.

“Fortunately for us, we really don’t have to know exactly,” Bruce said.

He has adapted to this market, limiting long-range trade setups and deferring to short-term plays that manage risk. The focus is on the latest data releases and market price action.

“We’re trying to just read the market and we have to do that day-by-day,” Bruce said, noting that longer plays are too unpredictable.

To manage trades in this market environment, Bruce targets “multi-leg” setups. These range-bound trades include calendars, triple calendars, double diagonals, credit spreads, iron condors, and butterflies.

Instead of past longer plays of a few weeks or months, Bruce has shifted to shorter dated plays covering just several days or weeks.

Bruce noted that over the last year in the ES, only once has the index extended higher to the 3 average true range (ATR). The ES then fell off, moving back to the mean and then lower to the -3 ATR. Stock charts are showing the market looking very similar to this scenario.

While this is not a prediction, the observation based on historical data from stock charts can offer caution when trading current market conditions.

“The point is to not go put all your eggs in the bullish basket thinking this is going to continue,” said Bruce.

Where to trade in this shifty market?

Traders can look for outperforming sectors and stocks that are growing and not flowing with the overall back-and-forth market.

Key technology and retail sectors and stocks appear better positioned in price relative to the broader market following extended declines from November peaks in price, according to Mary Ellen. This is a limited list as not all stocks have the criteria for a continued move higher.

Mary Ellen looks for growth assets that outpace the market.

Growth assets tend to trend higher as the broader market struggles. When searching for possibilities, relative outperformers during a bear market or correction will far outpace their peers.

She focuses on selections with solid growth prospects which tends to attract “big money” players who could bid the stock price higher. Significant earnings growth is a selection consideration. Reported positive earnings and industry group improvement can also help propel the stock higher.

Stay on the right side of market moves

Traders should keep in mind that any positive data or bad data release could reverse the market. The key is to not have a trade sitting on the opposite side of this sudden turn.

Simpler’s traders are maintaining fewer setups across the board that limit exposure either bullish or bearish.

“Hopefully the smoke will clear and we’ll get back into a more normalized market,” Bruce said. “I don’t think that’s going to be in the next several months.

“We’ll see, as the data continues to come in.”