They say the first cut is the deepest. Likewise in the stock market, the first pullback in a new uptrend is always the scariest. That’s because a new uptrend usually follows several false rallies, and bear-wary investors who bought stocks during those false rallies often take the opportunity to get out while they are closer to even.

The transitional period from bear market to new bull market can be perilous. Here are the indicators to watch.

Hope and Reality

Hope is eternal, and there is a philosophical movement which espouses that reality is an illusion and that once we die, we enter into a state of eternal bliss. Existentially, the thought of immortality on a higher plane of existence is certainly attractive.

Yet, in the dark recesses of stock market, there is only one truth, the current price tick on any given asset, and the trend which forms when one tick is added to another. Moreover, this dynamic reality is dependent on the flow of money into and out the market. And in this market, it’s all about earnings in the short term and the actions of the Federal Reserve over the longer term.

Short-term traders make decisions on the current action in the market. On the other hand, intermediate- and long-term investors focus on what may happen over the next few weeks or months. This article focuses on the latter mindset.

The current market zeitgeist holds that the central bank will raise interest rates by 25 basis points. Certainly, that may or may not happen, but that’s what the market is expecting. More important, however, is what the Federal Reserve says about its future plans.

If the above leak-based report is true, that is certainly good news. Yet, some recent Fed speakers have suggested that it’s time to pause, while others have noted that slowing the rate of rate increases makes sense. All seem to agree on one thing, that interest rates should not fall for the foreseeable future.

And it’s that consensus, along with how the market responds to whatever the Fed says and does after its next Federal Open Market Committee (FOMC) meeting that investors should focus on from a macro standpoint.

Meanwhile, earnings season is providing a reason to sell for some.

Bulls Have Taken Over the Market

The short-term market trend may reverse, but the long-term trend has some room to maneuver.

For the past several weeks, in this space, I’ve noted that the technical influences of the stock market have been increasingly bullish. Moreover, the bullish technicals remain in place, especially as expressed by the market’s breadth, the difference between the number of stocks that advance and decline. This is best measured by the New York Stock Exchange Advance Decline line (NYAD), which continues to gain ground.

This week, I want to look at NYAD from a very long-term perspective, because it reflects a reversion to its long-term mean, the 200-day moving average. The price chart below contains the NYAD (jagged central line), the 200-day moving average (dark blue line) and the upper and lower Bollinger (BB) or volatility bands (red lines above and below the general trending NYAD).

Each BB plots two standard deviations above and below the 200-day moving average. Price movements between these lines are considered to be within the limits of long-term trends. When the NYAD touches or moves above the upper BB or falls below the lower BB, it signals that the current long-term trend has reached a point where a long-term trend reversal is likely.

You can see multiple times in 2020 when NYAD touched or moved above the upper BB that at least a short-term pullback occurred. By September 2021, you can see the market had run out of gas. By December the top in stocks was fully formed, and the descent into a bear market was heralded by the decisive move of the NYAD at its 200 day moving average and its failure to rebound above this key indicators.

Note also the powerful reversal in the summer of 2022 after NYAD moved below the lower BB, rebounded but failed to rally above the 200 day moving average making a new low for the bear market.

Now note that in October 2022, NYAD fell below the lower BB and rebounded more forcefully. This rally has taken the NYAD well above its 200-day moving average, signaling a full long term trend reversal.

Money Is Moving into Tech Stocks

Microsoft (NSDQ: MSFT) delivered a gut punch to investors with its poor outlook during its recent earnings report. But, in my opinion, the bullish trend has left the station. Witness the action in the semiconductor stocks, prior to the Microsoft news.

Many are still worrying about supply chain issues and the inventory hangover in PCs as the work from home dynamic is reportedly reversing. Others are worried about automobile sales slowing and decreased demand for semiconductors.

I’m seeing reports that Amazon (NSDQ: AMZN) is not renewing a major office space lease in Seattle as it factors in having more of its employees work from home. According to the report: “the decision to let the lease expire is not related to the (recently announced 18,000) layoffs, the spokesperson said. Rather it is a response to the ongoing shift to remote and hybrid work after the COVID-19 pandemic first sent many people home for work.”

And Amazon is not alone. Meta (NSDQ: META) and Microsoft are also letting go of office space, citing “work from home” as a major catalyst in their decision. That tells me that PC upgrades to work from home may be on the way. And that means a steady incr

There are no coincidences. And as far as I’m concerned, that ultimate truth in investing, that current tick gets the nod, which is why the action in the Van Eck Vectors Semiconductor ETF (SMH) recently caught my attention.

Bullish Price Chart Beckons

Note that SMH is well above its 200-day moving average. As in the case of NYAD above, this signals a change in the long-term trend, from bearish to bullish. Note also that the Accumulation Distribution Indicator (ADI) is in a steady uptrend, a sign that short sellers have left the building.

Further note that the On Balance Volume (OBV) indicator has bottomed out and is turning up. That’s a sign that buyers are tiptoeing back into the technology sector.

Finally, note that the current rally has taken SMH above the Volume by Price bar (large bar left side of chart). That’s a bullish sign because there were a lot of sellers there which have been overcome by buyers.

It’s All About the Fed Now

The short-term trend may have rolled over after a market rally which started back in October 2022.

There are a lot of naysayers and doom-and-gloom analysts out there pounding the table that this is still a bear market. But at this point, that’s simply not true, at least based on improving money flows and the movement of prices above key long term resistance areas.

Of course, the current bullish trend could easily be reversed on or before February 1, 2023 when the FOMC reveals its next decision on interest rates.

Moreover, I fear the post announcement press conference, when Fed Chair Jerome Powell will answer reporters’ questions. As my colleague John Persinos has so aptly written, Mr. Powell in his public statements tends to be “maladroit,” which is otherwise described as unskillful and clumsy.

So what’s the bottom line? The stock market is in a bullish trend at the moment. Unfortunately, Microsoft’s guidance has spooked investors and the Fed could easily wreck the whole thing with its statement and Powell’s press conference.

It may be tempting to sell whenever the market panics on earnings, or on a well-founded fear of the Fed. But there’s at least an equal chance that recently emerged long-term uptrend will hold. The key is what happens at the 200-day moving average, the decision point between long-term up and down trends.

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