The market has done a 180 in terms of mood over the last 2 months. It's yet another reminder that 'sentiment follows price'. At the lows, the prevailing narratives were sky-high inflation, a breakdown in growth stocks, a hawkish Federal Reserve, and a looming recession that was going to culminate in a significant decline in earnings.

After more than six months of triumph for the bears, they are on the retreat and rethinking their priors due to a nearly 20% rally for the Nasdaq and 15% gain for the S&P 500 (SPY  ) since the mid-June low. This is clearly the longest and most sustained rally in 2022 and is different in a qualitative and quantitative sense than previous advances in 2022.

This has also coincided with a better-than-expected earnings season and economic data which undermines the recession narrative. In addition, we had extreme levels of bearish sentiment, high levels of fund managers holding cash, and very low levels of stock ownership, specifically for tech stocks.

Given these developments, it's a good time to try to determine whether this is a new bull market or another bear market rally.

Inflation

Possibly the most potent bearish threat facing the market in 2022 is inflation which kept creeping higher, reaching a level above 9% that hasn't been seen in decades. High inflation means a hawkish Fed and higher short-term rates which are particularly negative for financial assets. After all, why would investors take risks in terms of borrowing money or buying stocks if the risk-free rate of return is sufficient?

Adding to this risk were energy prices. These were climbing higher, entering 2022 but accelerated due to the Russia and Ukraine crisis. Nasty side effects have included soaring electricity prices and broad-based gains in oil, coal, natural gas, etc. The issue is also conflated with national security and politics which means that the US and EU are willing to absorb these higher prices in order to oppose Russia's incursion into Ukraine.

There doesn't seem to be a resolution to the conflict between Russia and Ukraine, but there are some positive developments in terms of inflation. Leading indicators are pointing lower. Supply chain issues are being sorted out with retailers now discounting prices due to excessive inventories. Auto production is returning to full capacity and the housing market has slowed in a major way. Most importantly, there is relief in terms of lower gasoline prices.