Learning from History: The possibility of NASDAQ Composite Index entering a bull market may be false!

Last week, the NASDAQ Composite Index closed 20% higher than its recent bear market low.

The S&P 500 Index has been in a bear market since falling from its all-time high in early January 2022, while the Dow Jones Industrial Average exited a bear market in November of last year.

According to Wall Street standards, a 20% rise from a recent low signals the start of a bull market, while a 20% decline signals the start of a bear market. This means that the market is always in either a bull or bear market.

Sam Stovall, Chief Investment Strategist at CFRA, pointed out that the NASDAQ-100 entered a new bull market on March 29th after closing more than 20% above the bear market low set on December 28th, which was widely publicized by the media.

However, investors should remember that many apparent bear market exits have proven to be "false dawns."

He noted that the problem is that "in the past, both the NASDAQ Composite Index and the S&P 500 Index have given false signals of bear market bottoms, prematurely indicating the start of a new bull market, defined as a 20% rise from the previous bear market low."

Stovall said that as shown in the table, the NASDAQ-100 has experienced eight bear markets since its inception. Half of these bear markets had false bottoms, such as in 1998, 2000-2002, 2007-2009, and 2021-2023.

"The current bear market has already seen a bottom, and time will tell if the current bull market is real," Stovall wrote.

The S&P 500 Index has also been affected by false bottom signals, but much less frequently.

Stovall said that of the 14 bear markets since World War II, the S&P 500 Index only had false bottoms in 2000-02 and 2007-09.

Stovall pointed out that the NASDAQ-100 had five declines during the 2000-2002 bear market, with lower lows occurring between half a month and 8.2 months after the "false bottom" signal was issued.

"Therefore, one might conclude that a new bull market must meet two criteria: 1) a 20% rise from the bear market low, and 2) no lower lows within nine months," he said.