Pullback is Probably Almost Finished (12/16/2022 Pre-Market)

I continue to be confident that the October lows on the major U.S. stock indices was the bottom of the drop from the Nov 2021 / Jan 2022 highs. This decline was an Elliott Primary Wave II of the bull market from March 2020.

In the new bull market advance that began in Oct 2022, I think that the Dow and S&P are currently in their first drop of Minor degree. Historically, drops of this degree are not much more than 5%. Right now, the Dow is down 4.3% from the high on Dec 13, so I do not expect a lot more downside from here.

The S&P is down 4.9% from the interim highs of Dec 1 / Dec 13. If there is more downside ahead, I don’t expect more than another 1% – 2%.

The NDX has been a major laggard in the advance from the October lows. It is possible that the NDX could fall to the lower trendline shown on the chart above, which is currently a little under 11,000. Meeting the trendline would likely involve a drop of 3.5% – 4.0% from the current level.

Update (12/7/2022 Pre-Market)

The U.S. stock market has gone into a pullback prior to the S&P 500 reaching the upside target of 4377 in my previous post. This pullback may have been prompted by the Dow reaching the area of its August high.

From an Elliott Wave perspective, I think this drop is, at most, a corrective wave of Minor degree, which typically isn’t much more than 5%. Right now, the Dow is down 2.9% from the recent high, and the S&P is down 3.9%.

The only thing that would cause me to doubt my long-term bullish outlook would be if the Dow or S&P go into a drop bigger than 7%, combined with significant signs of a recession (in my judgment, that would mean: ISM index falling to 45, monthly BLS jobs report turning negative, or Atlanta Fed forecasting negative GDP growth in Q4).

None of those indicators are close to the respective criteria above. The most recent BLS report showed a gain of 263,000 jobs in November, ISM is only showing a slight contraction in manufacturing (index is at 49), and the Atlanta Fed is forecasting 3.4% annualized GDP growth for Q4.

I am aware that many analysts are expecting a recession next year. If a mild recession were to happen, it would not change my stock market outlook, because I think the 25% drop in the S&P priced in such an economic scenario. If I’m wrong about this, I will let the market tell me that I’m wrong. The sign that I’m wrong would probably be a drop greater than 7% on the Dow or S&P occurring with the backdrop of recessionary economic data.