Are stocks back in a bull market?

Are stocks back in a bull market?

Equity indices in the US, Asia and Europe keep creeping higher but seem to do so cautiously as many investors remain worried about the recent banking crisis flaring up again.

It is true that several more smaller US regional banks may still collapse this year but it is unlikely that a major ‘too big to fail’ bank does so and threatens global financial stability in the near future as central banks all over the world have made sure that liquidity is provided to those financial institutions which need it and other solutions such as the take-over of Credit Suisse Group AG (CH) by its bigger rival UBS Group AG seem to have averted a full-blown financial crisis as the one seen in 2008.

A recent example of the financial system weathering the storm was the sudden panic surrounding Germany’s largest bank, Deutsche Bank AG, which saw its share price drop by up to 30% since the beginning of the month as the cost of insuring its debt against default through credit-default swaps soared despite the bank having been profitable for several years following its restructuring plan and showing a healthy Common Equity Tier 1 (CET1) capital ratio of 13.4%.

Despite the high volatility surrounding its and other banks’ share prices, no contagion occurred with volatility coming down again as the banking sector stabilised this week.

Yes, the banking sector isn’t out of the woods yet as can be seen by the iShares Stoxx Europe 600 Banks ETF but when one looks at the Euro Stoxx 600 index (orange line), it becomes clear that investors are buying the dip with regards to non-banking shares which has led to several global equity indices regaining most of their recent losses.

iShares Stoxx Europe 600 Banks ETF versus Euro Stoxx 600 daily chart

Why further upside in stocks is likely to ensue

Except for the Dow Jones Industrial Average, which remains in negative territory year-to-date, all other major US and European equity indices continue to perform well, with the Nasdaq 100 outperforming greatly. The index is about to make a 20% gain year-to-date as investors over the past couple of weeks switched out of banking into technology stocks.

Major US and European banks year-to-date performance comparison chart

With most European indices such as the CAC 40, DAX 40 and Euro Stoxx 50 and 600 now trading between 1% and 3% below their early March highs, and indices such as the Nasdaq 100 even briefly making a new seven month high, the odds favour further upside to be seen in the days and weeks to come.

Technical reasons pointing to a continuation of the equity bull market

The fact that these above mentioned indices have all risen and closed on a daily chart closing basis above last week’s relative highs and their respective 200-day simple moving averages (SMA) is technically significant and points to the continuation of the October 2022 medium-term bull market.

New index highs for the year are thus likely to be seen across the board, provided, of course, that no bearish reversal takes these indices below their respective March lows which would probably mark the end of the current bull market.

Since volatility indices such as the VIX have practically slipped back to levels last traded before the banking crisis kicked off and since seasonality points to a strong April, further upside looks probable, especially since the Advance/Decline line (A/D line) – which shows how many stocks are participating in a stock market rally - on many stock indices is turning back up again.

S&P 500 daily chart

Lagging indices such as the Dow and the S&P500 are also showing signs of improvement and look to be on track to close above last week’s highs as well this week which would solidify the recent recovery rally with the S&P 500 once more trading above its minor psychological 4,000 mark.

Ideally technicians would like to see a daily chart close above the early March high at 4,078, in which case a bottoming formation is most likely being formed with the August peak at 4,325 representing an upside target for the months ahead.