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FutureStarrThe Stock Market is on the Verge of Signaling That the Bear Market is Final
According to an obscure technical indicator, the stock market could be on the verge of signaling that the bear market is finally over. The S&P 500 is set to close above its 10-month moving average for the first time since it plunged 20%.
Benchmark losses of this magnitude typically signify an impending recession, but the latest decline may seem less concerning at first glance than it might appear at first glance.
The stock market appears to be nearing a turning point, with recent moves above their 10-month moving average. This rare occurrence could be an encouraging sign for investors.
Since June 2022, the S&P 500 index of 500 stocks considered large-cap companies has been in bear market territory. This marks a decline of 20% or more from its previous high and marks the first time since mid-November 2012 that the index has moved below its 200-day moving average.
As previously discussed, bear markets are part of a natural cycle but can be challenging to bear. That is why it's essential to comprehend their implications and how they could influence your portfolio.
Many investors may not feel confident entering the stock market during a bear, but there are strategies that can help you avoid getting caught in its downward spiral. One such strategy is diversifying across multiple asset classes according to your risk tolerance and stage in life.
Another strategy is to use an indicator that can help you predict when a stock may turn around. For instance, the Santa Claus rally, which typically occurs during the last five trading days of January and the first two days of February, can often serve as an indication that the year will begin strongly.
It's wise to monitor the six-month moving average. This can serve as an early warning when a bear market may be ending, since it typically peaks in December and rises during times of stress.
The six-month moving average is a popular indicator for assessing the medium-term price trend of the S&P 500 index. However, it can be difficult to interpret, so it's best to get a chart that displays price action over time.
The stock market appears to be nearing the end of its bear market. Last week, its index, the S&P 500, closed above its 50-day moving average and indicated that it has made new highs and is continuing its upward trajectory.
History shows that when the S&P 500 closes above its 50-day moving average, it typically follows on with a positive run. This is known as a "golden cross," and investors should expect an identical outcome this time around.
It could also be indicative of investors becoming more knowledgeable and taking calculated risks, potentially leading to higher stock prices as the bull market returns.
Particularly as inflation begins to slow and long-term interest rates drop, it could be an ideal time for investors to purchase bonds that usually perform better during times of economic stress.
Bonds and stocks in sectors generally considered safe and secure, such as consumer staples or utilities, tend to fare best during bear markets. These industries provide essential goods and services people need even during times of financial uncertainty; thus, they can help safeguard portfolios against further declines.
Investors should always remember that bear markets can be dangerous, and it's never wise to put all your money in one stock or investment. Doing so could result in the loss of all your funds, or you might end up with a significant loss when the bear market ends.
Another reason to avoid going all in on a stock is that when prices enter a bear market, it often creates an upward spiral as investors sell more shares and drive prices down even further. This makes it difficult to hold onto assets with declining value - which poses particular difficulties for retirees who depend on their retirement funds for living expenses.
It is essential to remember that bear markets are rare and usually short lived. In fact, over 92 years of market history, bear markets have made up only 20.6 percent of all cycles.
One way to protect against a bear market is by investing in index funds. These funds typically track an index, such as the S&P 500, and offer investors access to various potential outcomes.
The S&P 500 is a stock index that tracks large-cap companies. To be included in the index, companies must meet certain criteria such as having sustained performance and having a market capitalization above $500 million.
A company's market capitalization, or how much its shares are worth relative to their total number of outstanding shares, determines its influence on the index. The S&P 500 weights each stock according to its market cap; consequently, companies with larger market caps have a larger effect on the overall index.
The stock market may finally be signaling that the bear market is over. After taking a brief pause, the S&P 500 has moved above its 200-day moving average - an indicator of reliability historically speaking.
The S&P 500 is a market capitalization-weighted index that tracks the performance of 500 corporations that meet certain criteria, such as liquidity, size and industry. Each quarter, this list is rebalanced by an independent committee which selects companies based on these same factors.
Over time, the S&P 500 has offered investors higher returns than other major assets and been seen as a secure investment. It has seen increases in value during economic booms and decreases during recessions.
But there will be times when the S&P 500 experiences a bear market and stocks plunge sharply. This is an inevitable part of investing.
Investors must exercise caution and patience during these downturns, as holding onto assets that are losing value can be a daunting challenge for months or even years at a time.
Investors with equity interests often face a temptation to sell their assets and move into safer investments such as cash or bonds, but this could result in missing out on long-term gains.
To take advantage of these market upswings and downturns, you need a sound investment strategy that considers the long term. Ideally, invest in a tax-advantaged account which permits you to buy stocks without incurring any tax liabilities.
One of the most widely-used investment strategies is using long-term moving averages to assess price trends. These are essential as they can assist in predicting future prices levels and avoiding losses.
In December, the S&P 500's six-month moving average flipped higher - a sign that bear markets may have officially ended.
In fact, this is the first time in this bear market that the six-month moving average has actually moved higher.
Stocks have gained about 5.4% this month, cutting their year-to-date loss from -26.7% to -14.6% for 2022.
It is encouraging that the S&P 500 has moved above its six-month moving average, although it remains uncertain if this bullish trend will last. Nonetheless, investors should continue to expect further gains as it surpasses both its 50-day moving average and closes above its 200-day moving average.
Additionally, the S&P 500 has historically displayed a positive bias when its long-term moving averages cross above each other. For instance, in 2008 the index rose 19% when its six-month moving average surpassed its 50-day average; and two years later it gained 23% when its long-term moving average crossed above its 200-day average.