The recent rally in stocks (SPY) has been impressive. But it’s still officially a bear market, and there are 5 reasons bears won’t be waving a white flag anytime soon. Let’s take a look at why stocks rose… why they are likely to hang at this level… and the 5 reasons why the bearish argument is likely to win the day. Read all that and more in the comments below.
(Enjoy this updated version of my weekly commentary from the Reitmeister Total Return Newsletter).
The shares have been rising almost unabated for 2 months. A lot of it was because it was easy for stocks to “climb the wall of worrycreated by the initial decline in the bear market area.
This means it was pretty easy to find just enough silver liners or things that didn’t go as bad as advertised for stocks to bounce off that recent bottom. But as we now discover…all good things must come to an end.
This meant investors finally found resistance at the S&P 500’s 200-day moving average (SPY) at 4.326 and quickly retreated from that point to the finish line on Tuesday. Expect this level to mark the near term highs for the market as we are likely to enter a consolidation period with trading range to follow.
Why? And what are the parameters of this trading range? And what will cause us to break out of range?
All that and more will be the focus of this week’s Reitmeister Total Return commentary.
Technically speaking… we are still in a bear market. That is certainly confusing for many investors, given several weeks of upward price action. So let me spell it out for you.
The definition of a bull market is when you come out of a bear market and have risen 20% from the bottom. Well, the recent bottom for the S&P 500 (SPY) is 3,636.87 and yet today we closed at 4,305.20, which is 18.38% above the lows.
It may sound like mincemeat to continue calling it a bear market as it is nearly 20% above the lows. However, I think it’s an important distinction at this point to help set up a real battle for the soul of this stock market.
The bulls have indeed gained the upper hand in the past 2 months. But a lot of it was just”climb the wall of worrylike the market days quite often. That’s where the sentiment is so bad it’s only worse than terrible to unleash a rally. And once the rally gets going, you get the FOMO part where people get scared be to miss out on the upside potential.
It’s one thing to say things aren’t really that bad, rather than say they’re good enough to fuel the full-blown bull market resurgence. That is why the 200-day move at 4.326, also known as the long-term trendline, is a very interesting battleground for investors.
Check out Tuesday’s intraday chart below to see how stocks flirted with the 200-day moving average and then quickly changed course:
I firmly believe that there is not enough serious bullish sentiment at the moment to create a break above the 200 day moving average. On the other hand, the bears have more to prove to make their case. This creates the perfect environment for a consolidation period and trading range.
Yes, the relationship between high inflation and recessions/bear markets that will follow is very strong, as can be seen in the chart below:
However, until this starts manifesting in a weakening of the labor market and/or profit sessions for corporate America… And so the tug-of-war between bulls and bears should begin now.
The top of the range should be the 200 day moving average at 4,326 and the bottom of the range is probably the 100 day moving average at 4,100.
Reity, why are you stubbornly advocating a bear market when clearly other investors have spoken, given the strength of the recent rally?
Because I have an economic background. And high inflation goes hand in hand with recessions and bear markets like peanut butter and jelly. It’s really just a matter of time, as the chart above shows. So it may not have happened yet, but the problem is still big.
Second, we have an inverted yield curve that is one of the most proven indicators of an impending recession and bear market. Why? Because bond investors say they see a long-term recession coming that is naturally deflationary. The rates will therefore be lower in the future than they are now.
Third, the Fed feels a little too good about the economy it sees as a green light to hike rates like crazy in the coming months. Bond investors have already weighed this idea with the inverted yield curve, meaning they think the Fed will help drive a recession. Equity investors will likely get the memo again once they see the damage showing up in employment and/or corporate earnings.
Fourth, the weekly jobless claims reports are the leading indicator of what will happen to monthly job growth. That has been going in the wrong direction since mid-March. Note that it is generally believed that once unemployment claims rise above 300,000 per week, the unemployment rate begins to decline. That wake-up call may not be that far in the future.
Fifth, that this feels like the long-term bear market from 2000 to 2003 that started with a valuation bubble burst and later went into recession. That’s why you can see in the chart below that it took about 3 years of declines followed by seemingly impressive jumps and then more dips to finally find real and lasting lows in March 2003 before a healthy new bull market could emerge.
Does this bear really last 3 years?
Could be. Maybe not. But I’m just saying the battle isn’t over and so I think stocks will stall at these levels pending a clear catalyst for a convincing breakout in a bullish or bearish direction.
My money is clearly bearish for the reasons stated. But yes, I am open to the bullish premise to win the day. That is why our hedging strategy is the right one for the time being. That’s equal allocations to inverse ETFs and long stock positions.
As stated in Monday’s trading alert:
“If we move above the 200 moving average with flying colors and there’s more reason to be optimistic, we’ll start selling our inverse ETFs and adding more stocks.
On the other hand, if my statement is correct that this is a long-term bear market and we start to pull back, then we will do the opposite. That is to sell the stock and maybe add more inverse ETFs. Evidence of that would likely fall back below 4,000.
You can simply think of a hedge as the start of a tug-of-war with both sides equal. Whichever side starts to pull… we’ll jump on the bandwagon to join the winning team.”
I think that last paragraph pretty much says it all and leaves it at that for now.
What to do?
Discover my hedged portfolio of exactly 10 positions to help generate profits if the market falls back into bear market territory.
This is not my first time using this strategy. In fact, I did the same at the start of the Coronavirus in March 2020 to generate returns of +5.13% in the same week the market plunged close to -15%.
If you are completely convinced that this is a bull market… just ignore it.
However, if the bearish argument shared above makes you curious about what happens next… consider my “Bear Market Game Planwhich contains details of the 10 positions in my hedged portfolio.
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 $0.12 (+0.03%) in after-hours trading on Tuesday. Year-to-date, the SPY is down -8.86%, versus a % increase in the benchmark S&P 500 index over the same period.
Steve is better known to the StockNews public 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, along with links to his most recent articles and stock selection.