It’s easy to appreciate investor confusion right now. Just when you think the bears are back in charge… Then comes a big 3-day rally that challenges everything. But why have stocks rallied? And why are most signs still pointing to a downtrend? And why does Steve Reitmeister think 3000-3200 is the most likely destination for the S&P 500 (SPY) this year? The answer to these vital questions and many more awaits you in this timely market commentary below.
Stocks took advantage of a good post-Labor Day rally to end a 3-week bear streak. This follows good news about the economy.
Unfortunately, there are two ways to look at this good news. And the other way is quite negative, which is why concerns about further bearish decline are still significant.
We will review these recent catalysts and what they predict about future market conditions in this week’s commentary.
First the facts.
After several sessions below 4,000 shares, they rallied above Thursday and pushed even higher Friday to close at 4,067. That ends the three-week selloff from mid-August when the S&P 500 ( SPY) broke above 4,300. Yet, we are still well above the June lows of 3,636.
I believe we find a new balance at these levels by balancing the bullish and bearish possibilities. That means I don’t think we’ll go much higher…or much lower in the near term. More than one trading range scenario is likely to emerge as investors wait for new facts that would alter the bullish/bearish odds.
You already know that I am bearish for reasons stated over and over again in my recent comments. So I’ll spare you the regurgitation of all that logic right now.
However, I want to make it clear that it’s more important to me to be profitable… than to be right. Which means if any new facts emerge that are decidedly bullish… I would love to shed my current bear coat and become a raging bull within seconds.
This last point is important for you to understand so you can appreciate that I am not unnecessarily bending the facts towards a bearish slant. I’m just trying to share that there really is more than one way to watch the latest newsbytes.
Let’s start with the fall in energy prices which hit $125 just a few months ago and are now in the low $80s. The good news should be obvious to everyone, because energy is so central to the inflation equation. So if prices are falling so much so soon, then maybe the Fed doesn’t need to fight so hard to get inflation under control.
Now consider the other side of the coin. Prices are NOT falling due to current supply and demand dynamics. Rather, it is energy speculators driving prices down given their worries about a future recession. And yes, recessions naturally mean lower demand, which leads to lower prices.
If these energy traders are right, that portends more trouble ahead for the economy as a whole. Meaning recession. And indeed, recession and continued decline in stock prices go together like peanut butter and jelly.
Now consider the still strong employment picture. I had recently discussed how the weekly jobless claims potentially showed cracks in the strong employment base, with the number of weekly claims rising steadily since March.
Well, in the past few weeks that trend has reversed, with unemployment insurance claims declining. This likely means jobs gains in the economy will be robust again for the August reading.
This points to another similar double-edged sword that I shared with falling energy prices. On the plus side, the job market may be robust enough to handle the Fed’s higher rate drugs. So if they can get inflation under control without really damaging the job market, then a soft landing will indeed have taken place, which will get the bulls into the races.
On the other hand, this healthy employment picture could encourage the Fed to raise rates more aggressively than necessary. And once the ball starts rolling on a weaker job, it usually continues to roll in that direction. This is revealed when you consider this vicious circle:
Fewer jobs > less revenue > less spending > less profit > cutting more jobs
And the cycle continues flushed and repeated for a long time, leading to a deeper recession…and steeper stock price declines.
Back to Fed Chairman Powell’s comments from Jackson Hole. Raising rates will cause pain… and damage the image of the job.
Not maybe… WILL.
In this case, we should take the Fed at its word, as it is optimistic rather than pessimistic in its comments. So if they tell you the pain is on its way…you better believe it.
That’s why I remain bearish even after this recent round of potentially good news…and the recent rebound in stock prices. Clearly, the highly respected folks at Blackrock feel the same way considering the comments below:
“The Fed will be surprised by the damage to growth caused by its tightening, in our view. When the Fed sees this pain, we think it will stop raising rates. It will be too late to avoid a contraction in activity economy by then, we think, but the decline won’t be deep enough to bring PCE inflation back to the Fed’s 2% target… That’s a big deal. Central bank targets mean crushing demand with a recession.This is bad news for short-term risky assets.
Just in case you weren’t clear…stocks are indeed risky assets. The same goes for crypto, so don’t get caught up in today’s rally. Probably a lot more downsides to this party which is typical after a bubble has formed.
Let’s get back to basics…
Remember that bull markets do not go straight up. We have many down days…weeks…even months mixed together. Yet, we all still appreciate that the main long-term trend is up.
The same is true during an upside down bear market. There will be days, weeks and months. Heck, we even suffered an 18% rally from mid-June to mid-August. And yet still in the midst of a long-term bear market.
Given the evidence in hand, I’m still bearish, but appreciate that all of this pullback to an eventual bottom closer to 3000-3200 on the S&P (SPY) won’t happen quickly or easily.
Instead, I suspect we’ll be a bit more constrained in the short term. Maybe up in the range to 4,100… maybe down to 3,855 (20% decline line from all-time highs).
And this trading range represents a fair balancing point for people to think about what’s next. And how much the Fed will have to raise rates to bring inflation under control. And how much damage will it cause to the economy and stock prices.
The less painful this picture will be…the more bullish things will become.
However, if the Fed is true to its word and the majority of market forecasters are correct, then it will be painful…and will likely lead to recession…and lead to a broader and deeper bear market than what we have seen. so far.
The latter is what I’m betting on right now…and explains the trading strategies I’ve employed in my trading alert services.
What to do next?
Check out my hedged portfolio of exactly 10 positions to help generate gains as the market drops back into bear market territory.
And yes, it has worked wonders since the Fed made it clear that there was more PAIN ahead, which sent stocks tumbling from recent highs above 4,300.
This is not the first time I have used this strategy. In fact, I did the same at the start of the Coronavirus in March 2020 to generate a return of +5.13% the same week the market crashed -15%.
If you are fully convinced that it is a bull market…then feel free to ignore it.
However, if the bearish argument shared above has you curious about what happens next… then consider getting my “Bear Market Game Planwhich includes details of the 10 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 fell $0.10 (-0.02%) in after-hours trading on Friday. Year-to-date, SPY is down -13.76%, versus a % rise in the benchmark S&P 500 over the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, plus links to his most recent articles and stock picks.
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