“Maybe.” That’s the only fair answer as to whether last week’s rally — violent and infrequent, however large and rapid it was — will prove to be a major market reversal point, or matter at all. Such things are only recognizable in hindsight. Right now there is literally no answer – whether the market has turned depends on many economic developments, unforeseen bolts from the blue and coming mass reactions. If it was purely a fluke, then Thursday’s reversal of the S&P 500’s 2.4% opening decline after the disappointingly high CPI report of a 2.6% gain probably wasn’t a game-changer. After all, bear markets have only one ultimate bottom, but many intermediate bottoms along the way. Friday’s unnerving slide in prices, giving up about a third of the entire ramp from Thursday’s low to Friday’s high, has eased the burden of proof a bit, but raises hope that recent lows were in the buy zone for some price-conscious bidders. If no one can confidently state the importance of the week, then making a bold decision isn’t crucial either. We can at least go through what we know about this market and how market cycles generally evolve. Explaining Thursday’s Mystery Rebound As jarring and unexpected as Thursday’s CPI whipsaw rally was, it happened at a logical moment and intuitive place. The S&P 500 as of Thursday morning’s low of 3491 was 15% lower than prior to the previous CPI report a month earlier, had fallen for six straight days and at 3500 had exactly half the monster rally from the March 2020 Covid crash low abandoned to the all-time high in January. That said, the band was overstretched and there was much tactical focus on these price levels as a potential culmination zone for the recent downturn. As noted here last week, 3500 is also an overall loss of 27% from the high – the median historical drop for recession-related bear markets and almost exactly 15 times expected gains. About 40% of total trading volume was in ETFs, an unusually high proportion of tactical top-down activity that showed short-covering and a quick grab for equity exposure by fast-money players. That’s not to say that a five-percentage-point intraday swing that spanned the index’s range for the previous three days should be dismissed as purely mechanical or meaningless noise. Such switchbacks often occur when sellers have exhausted themselves. Fewer individual S&P 500 stocks made a fresh 52-week low than in mid-June, although the index itself undercut the June low, a modest glimmer of positivity. As the Bespoke Investment Group notes, few days in the last three decades have been as rare as they have recently been. The previous extreme lows on this chart were almost notable market lows, though not always right there. A 1-day rally to a 1-week high followed by a dip back below 3600 on Friday probably wasn’t enough to burn all the negative sentiment or pull all the big bucks mispositioned for a rally back onto the side . Hence the chatter among interpreters of stock supply and demand dynamics that the “pain trade” is likely to remain on the upside in the near term, perhaps by at least a few more percent. That would be a switch. October is Known for Lows And – what no one could forget – it’s October, the month known for both its searing volatility and talent for creating lows. The Stock Trader’s Almanac notes that of the S&P 500’s 23 bear markets since World War II, seven ended in October. And the six months of a mid-election year beginning in November have been longer every time since 1950. This could well be read as a mixture of superstition, coincidence, vague seasonal rhythm and small sample size. And of course, the mechanical triggers of the rebound and the well-known seasonal tailwind might make it seem forced rather than organic. But the precedent is what it is and the same could easily have been said of September’s dismal season record, which has been confirmed this year. If the market had fallen sharply for three quarters of the year, stocks tended to rally higher over the next quarter and 12 months — with the notable exception of 2008 when the financial system went into a credit crunch and vicious recession. Similarly, buying stocks when the S&P is down 25% — even if the market then went down a fair bit, a year later the market was up on average, and even if it wasn’t, the damage over that period was minor . Be careful what you wish for. The palliative sentiment, seasonal patterns, and long-term mean-reversion trends mentioned here underscore that the bull market is about atmosphere. The cautious or bearish elements are those just ahead of the market that provide real-time risk appetite and valuation inputs. Simply put it is still a clear and ongoing downtrend, rallies are not particularly trustworthy in such circumstances. Earnings forecasts are slipping. The S&P 500 has failed to break above the 20-day short-term moving average in four attempts since late August, most recently on Friday. The largest and most widespread index stocks — the Nasdaq megaliths, excluding Apple — still look the weakest. Almost all of the surprises in inflation reports over the past year have been to the upside. 10-year Treasuries surged above 4% and Federal Reserve officials continue to suggest they believe significant economic pain will be required. This puts many investors in a “be careful what you wish for” mentality, where a short-term pause in Fed tightening is only expected in response to some sort of financial disaster. The logic is clear and no one knows what leaks may have occurred in the system (UK bond and bond markets, collapsing Japanese yen). But I am willing to suggest that the hunt for “black swans” in itself reflects the wake of the 2008 global financial crisis as much as it does a calculated assessment of clear and present dangers. After all, in 2008, not every investor and watcher was out there saying, “Watch out for a 2008 repeat,” like they are doing now. Is it forewarned? How much is left for the sale? Circumstances suggest being more cautious than usual about how much of this austerity is left for markets and the economy. This cycle has been idiosyncratic or even unprecedented on the way up and down. We’ve never had a flash recession short-circuited by massive, timely fiscal and monetary responses, or a 35% stock market decline as quickly as we did in 2020. If a recession comes but doesn’t happen until 2023, then it’s based on normal Based on historical lead times, the market appears to have peaked “too early” in January, and a market bottom now appears “too early” based on the pattern of stocks bottoming during a recession rather than before a recession. A decade-long downtrend in bond yields has been shattered. The Fed has dusted off a 40-year-old inflation war plan. We lived with interest rates at this level not long ago, sure, and economies and markets can adjust. But rates have never gone to zero or risen this fast (mortgage rates from 3% to 7% in six months). It is plausible to argue that much, if not all, of the necessary rebalancing of valuations, expectations and risk profiles has been undertaken. These big, important stocks like JP Morgan, Nike, and Walt Disney have fallen on a three-year basis, stripped of the flu of pandemic momentum they once had. That markets always bottom before the economy turns and that indexes don’t spend too much time at the ultimate bottoms, wherever they are. All valid points. I’ve done them a few times lately. Nobody knows exactly when they will play a role.