A month ago, the bulls claimed victory when they caused a chargeback above 4,000 for the S&P 500 (SPY). Since then, that false narrative has been brushed away, and investors are taking a more honest look at the bleak prospects posed by high inflation and a hawkish Fed. That explains why we are retesting the June lows. Now we need to think about what’s next and how to trade our way to profit. Read below for the full story.
I can count on one hand the number of times a bear market has failed to retest the bottom before the next bull market emerges.
It only takes one finger to count it… and that was the oddity of the Covid bear market, which rebounded violently from bottom in March 2020 and never came back.
This is one of the main reasons I knew the 18% rally in suckers from mid-June to mid-August was a mirage. The real problems of high inflation and the restrictive Fed were not yet solved. So it pointed to a future encounter where we would revisit those June lows…if not lower.
Now that we’re near those lows again…what happens next?
That will be the focus of this week’s commentary below…
The stocks flirted with the S&P 500 (SPY) support at 3,855 for several sessions. This was an interesting support point as it represents a 20% drop from the all-time highs, indicating bear market territory.
But then the Fed hit the hammer on Wednesday with another 75 basis point rate hike and language to say much more is to come. Perhaps the worst thing they said was how strong the jobs picture looks, giving them the green light to continue raising rates aggressively on the assumption it will cause less pain.
However, investors read correctly that the Fed will most likely inflict more pain. And that employment will deteriorate over time. Coupled with an ugly start to the Q3 earnings season, investors are in a rush to get back into the bearish territory below 3,855.
Next serious support point is retesting June low of 3,636. Shocking how quickly we got there as investors seemed in a hurry to get close to those levels on Friday with a session low of 3,647 before a 50-point jump to finish.
As I said back in August when the market was at 4,300, it’s weird, bordering on insane, when a bear market doesn’t retest the lows. Only a matter of time before it happens.
Some scoffed at this comment as if I couldn’t see the new bull market forming right before my eyes. However, I don’t believe in price action as much as I believe in fundamentals. And the basics say that…
High Inflation + Hawkish Fed = Recession & Bear Market Ahead
Those looking for cracks in the economy may have already noticed that we experienced two consecutive quarters of negative GDP growth earlier in the year. However, the third quarter looked pretty solid as the Atlanta Fed’s famous GDP Now model showed a potential reading of +2.6% for the current quarter. This was undoubtedly one of the reasons for the big upswing that followed from mid-June to mid-August.
Since the beginning of the month, however, the growth outlook has been pushed down after almost every economic report. And this week, as housing starts got underway, the GDP estimate was cut further to just +0.3%.
The only reason it’s not currently called a recession is because there’s no spike in unemployment. This level of economic pain would prompt the National Bureau of Economic Research, the official arbiter of recessions, to ring the bell.
Now let’s recall what the Fed said loud and clear. You have to suppress inflation. This can only be achieved through a long-term struggle to raise interest rates above normal levels, which WILL result in below-trend growth and weakening labor markets.
Don’t forget that the Fed has a bullish bias. So when they say these negative things will happen… you better believe it’s true. And unfortunately, it will likely be even more painful than the mild picture they are painting.
This is what investors have woken up to and explains why the market is back in bear market territory below 3855.
And why are we retesting the June low at 3,636 so quickly.
And that’s why I point out that the average bear market decline is 34%, which would equal 3,180.
Because of this, you should expect further downside from the current levels.
Yes, there will be bounces here and there. In fact, it wouldn’t be a shock if one were to appear anytime soon given how quickly we’re retesting the June lows with no concrete evidence of serious economic troubles in hand. This is a real weakening of the jobs picture or an earnings recession.
Indeed, FedEx’s dreadful gains a week ago may foreshadow another ugliness in Q3 earnings season. But until Wall Street analysts start predicting earnings declines (rather than just a slowdown in growth), it’s hard to say that everyone is anticipating a recession…and therefore likely isn’t ready to see the ultimate bottom of this bear market.
All in all, the market took a 3-month detour off the June lows. And now we are once again at the point where it needs to be determined whether inflation + hawkish Fed does indeed equal recession.
If so, then stocks will continue to fall. Probably somewhere between 3,000 and 3,200 will prove to be the bottom.
If not, then we may be solidifying the ground at this level…but don’t count on it. The much more likely scenario is a recession and a deeper bear market.
What do you do next?
Discover my hedged portfolio of exactly 9 positions to make profits if the market continues to descend into bear market territory.
Like the +3.89% gain this portfolio has experienced since mid-August when the bears regained control.
This isn’t the first time I’ve used this bearish strategy. In fact, at the start of the coronavirus in March 2020, I did the same to return +5.13% in the same week the market plunged -15%.
If you’re absolutely convinced this is a bull market…then don’t hesitate to ignore it.
However, if the above bearish argument makes you curious about what happens next…then consider my”Bear Market Game Plan“, which details the 9 positions in my hedged portfolio.
Click here to learn more >
I wish you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares were up $0.29 (+0.08%) after the close on Friday. Year-to-date, SPY is down -21.63% versus a percentage gain for the benchmark S&P 500 over the same period.
About the Author: Steve Reitmeister
Steve is better known to StockNews audiences as “Reity.” As well as being the company’s CEO, he brings 40 years of investment experience to the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his latest articles and stock picks.
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