A month ago, the bulls claimed victory when they returned over 4,000 for the S&P 500 (SPY). Since then, that false story has peeled off and investors are taking a more honest look at the bleak outlook fashioned by high inflation and an aggressive Fed. That explains why we are retesting the June lows. Now we need to think about what comes next and how to trade our way to profit. Read on below for the full story.
I can count the # times a bear market failed to retest the bottom on 1 hand before the next bull market occurred.
It only takes 1 finger to count it… and that was the quirk of the Covid bear market bouncing ferociously off the bottom in March 2020 never to return.
This is one of the main reasons I knew the 18% sucker rally from mid-June to mid-August was a mirage. The real problems of high inflation and aggressive Fed were not yet solved. So it pointed to a future meeting where we would revisit those June lows…if not lower.
Now that we’re near those lows again…What happens now?
That will be the gist of this week’s commentary below…
Shares flirted with support of 3,855 on the S&P 500 (SPY) for a few sessions. That was an interesting support point, as it represents 20% lower than the all time highs indicating bear market territory.
But then the Fed lowered the hammer on Wednesday with another 75 basis point rate hike and language saying much more is to come. Perhaps the worst thing they said is how strong the employment picture looks, giving them a green light to continue raising rates aggressively on the assumption that it will cause less pain.
However, investors are reading it right that the Fed will most likely hurt even more. And that employment will deteriorate over time. Add that to an ugly start to the Q3 earnings season and investors are in a rush to get back into bear territory below the 3,855 level.
The next point of serious support is to retest the June lows of 3,636. Shocking how quickly we got there, as investors seemed in quite a hurry to approach those levels on Friday with a session low of 3,647 before a 50-point jump reached the end.
As I mentioned in August, with the market at 4,300, it’s odd for a bear market not to retest the lows. Just a matter of time before it happens.
Some scoffed at that comment as if I couldn’t see the new bull market emerging before my very eyes. However, I don’t believe in price action so much as in the fundamentals. And the fundamentals say that…
High Inflation + Hawkish Fed = Recession & Bear Market Ahead
Those looking for cracks in the economy may have already noticed that we endured 2 quarters of negative GDP growth to start the year. However, the third quarter looked pretty solid with the Atlanta Fed’s famous GDP Now model showing a potential +2.6% for the quarter ahead. This was undoubtedly part of the reason for the great upswing that followed from mid-June to mid-August.
Since the beginning of the month, however, growth prospects have been lowered after just about every economic report. And this week after Housing Starts was introduced, the GDP estimate was further reduced to just +0.3%.
The only reason it isn’t called a recession right now is because there is no increase in unemployment. That level of economic pain is what would cause the National Bureau of Economic Researchthe official umpires of recessions.
Now let’s recall what the Fed said loud and clear. They need to crush inflation. This can only be done with a prolonged struggle to raise rates above normal levels, which WILL lead to below-trend growth and WILL lead to a weakening of labor markets.
Remember, the Fed is optimistic. So, when they say these negative things will happen… then you better believe it’s true. And unfortunately, it will probably be even more painful than the mild picture they paint.
This is what has awakened investors again and explains why the market is back in bear market territory below 3,855.
And why we are so quick to retest the June lows at 3,636.
And so I point out that the average bear market decline is 34%, which equates to 3,180.
And this is why you should expect more downside from the current levels.
Yes, there will be bounces here or there. In fact, it wouldn’t be shocking if someone got out soon, given how quickly we’re retesting the June lows with no concrete evidence of serious economic pain in hand. That is a real weakening of the employment picture or an earnings recession.
Indeed, FedEx’s horrendous results a week ago may foreshadow more ugliness in Q3 earnings season. But until Wall Street analysts start predicting earnings declines (not just a slowdown in growth), it’s hard to say anyone is expecting a recession… and thus probably not ready to make our way to the final bottom of this bear market .
All things considered, the market took a 3-month detour from the June lows. And now we’re back to a point where inflation + aggressive Fed does indeed equate to recession.
If so, inventories will continue to fall. Probably somewhere between 3,000 and 3,200 will turn out to be the bottom.
If not, we may be reinforcing the bottom at this level… but don’t count on it. The much more likely scenario is a recession and a deeper bear market.
What to do?
Explore my hedged portfolio of exactly 9 positions to help generate profits as the market descends further into bear market territory.
So is the +3.89% gain this portfolio has enjoyed since mid-August as bears have regained control.
This is not the first time I have used this bearish strategy. In fact, I did the same at the start of the Coronavirus in March 2020 to generate a +5.13% return in the same week the market collapsed -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 details the 9 positions in my hedged portfolio.
Click here for more information >
I wish you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Right”)
CEO, Stock News Network and Editor, Reitmeister Total return
SPY shares rose $0.29 (+0.08%) in after hours trading on Friday. Year-to-date, the SPY is down -21.63%, 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.
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