The S&P 500 (SPY) quickly moved away from 2 key levels of resistance on Wednesday following statements from Fed Chairman Powell. Now more people think that the 2022 bear market may be over and time to turn more bullish. 40-year investment veteran Steve Reitmeister sheds light on this topical issue in his new commentary. Spoiler Alert: He’s unimpressed and still believes the bears have the upper hand. Read on below for the full story.
I decided to release my weekly commentary a day earlier than expected because the shock rally this afternoon warrants commentary as we broke shockingly above the rather significant 200-day moving average for the S&P 500.
The short version means…this rally makes no sense!
The longer and more reasoned version is shared with you below…
The main event this week was Chairman Powell’s speech on Wednesday, as shares went from modest red arrows earlier in the session to a heartbreaking +3% rally by the end of the day.
I couldn’t help but yell at the TV screen again, just amazed at the dissonance between what Chairman Powell said versus the ever-expanding rally. So here are some of the notes I wrote as they were happening along with some deeper thoughts I added after coming down from the ceiling.
That’s my instinctive response to the pace of smaller fare increases going forward. This was well known and reported before. Shouldn’t have moved the market 1 tick.
The rate of rate changes has nothing to do with the much more important final rate (top rate) which almost everyone agrees is 5% or more. And then we have to consider how long they stay at that level. And how much damage is done to the economy while it is in place. And how that lowers the outlook for corporate earnings and stock prices.
Steve Liesman of CNBC is also scratching his head about the strong positive market reaction given all the signs beforehand. It was incredibly clear that the Fed would slow the pace of rate hikes, but still get to a rate of at least 5%, which is most certainly restrictive on the economy.
The “impeccable disinflationconcept was given a good laugh on the air. That Powell somehow thinks it is possible to reduce inflation without seriously damaging labor markets.
This has never happened before. Repeat… NEVER happened before. And to think it will happen this time is borderline absurd.
Rick Santelli came in to say that traders are clearly NOT listening to what Powell is saying. His assessment is that somehow traders think he is bluffing about the long-term nature of these rate hikes. That seems like a very dangerous bet, since Fed chairmen don’t typically bluff.
Back to inflation, Powell said that despite some positive signs in some areas of inflation, things like persistent wage inflation say we have a long way to go. This means the Fed will stay on track until the job is done… which again is a long way from here. Like at the end of 2023.
This is a bit like Jackson Hole’s August speech, where he kept repeating the concept of a protracted battle over and over again. There is really little difference between that speech and this one in terms of content. The big difference is in the price action, with Jackson Hole’s speech leading to a -18% sell-off in subsequent weeks. While Wednesday’s speech strangely delivered a +3% rally within hours.
Here’s an interesting tidbit that traders clearly didn’t appreciate. Powell agreed that Fed insiders have spoken of an equally high probability of a soft landing. And that view of things has not changed.
This may have caused a temporary pause in the bullish elation. But if you’re already drunk with irrational exuberance… why stop the fun there?
Let’s go back to the big picture…
It’s like everyone looks ONLY at inflation and interest rates and is completely blind to everything else. Like how bad the economy will get if interest rates stay high for a very, very long time.
Keep in mind that for most of stock market history, the future outlook for the economy has been the main signal to be bullish or bearish. That is why there are so many economic reports on things like manufacturing, services, employment, retail, industrial production, consumer confidence, etc.
On that economic front, it was odd to see the stock market go unmoved Wednesday by the truly horrifying Chicago PMI report, which many see as the leading indicator of what’s to come in the national ISM Manufacturing report. That came to 37.2 compared to 45.2 last month. Note that any value below 50 = contraction. Therefore, 37.2 is in the “holy s#*tcategory.
Yeah, not even close. Even more horrifying is the sudden dramatic drop in the forward-looking New Orders component from -8.5 to -30.7. This means that the ugliness should continue into the future. That is likely according to Thursday’s ISM Manufacturing report.
Let’s not forget the weakness that eventually shows up in employment. ADP posted just 127,000 jobs in November, up from 239,000 the previous month.
What people need to remember is that this lagging indicator is a slow moving train that goes from great to good to fair to bad to terrible in stages. This could be the next turn of the screw from good to fair.
The problem is that once that train starts rolling negatively, it’s hard to control. Not even the Fed can control employment very well. This means that this key indicator of economic health is set to get much worse in early 2023, consistent with most people’s expectations of a recession heading into the year.
Reity, you make a compelling fundamental argument as always. However, is it possible that the market is right given historical evidence of how well they predict things in advance…and so it’s finally time to shed the bear suit and become more bullish?
Yes that is possible. But still not the most likely outcome.
Once again, investors look beyond inflation and Fed rates… they will see that the economic rug has been lifted. The normal trigger for bearish activity. Once the focus is well returned there, it will be difficult to keep hitting the buy button to push prices higher.
WHEN that happens is the bigger mystery. And indeed “the market can remain irrational much longer than you can remain solvent.” (famous quote from John Maynard Keynes).
So, we need to keep an eye on the price action in the meantime, with the 200-day moving average being paramount.
Note that for a recent media interview I was asked the following question: If you could only use one indicator for the rest of your life, what would it be?
To which I replied…
“As a primarily fundamental investor, I can’t believe I’m saying this… but if I could only use one indicator to invest in, it would have to be something that can really tell if the market is bullish/bearish. And that should be the 200-day moving average for the S&P 500, which most people agree is the best long-term trendline.
If above, then it’s easy to be bullish by focusing on the best stocks according to the POWR ratings. And if it’s lower, it’s best to expect a further decline, leading to a more conservative investment approach, including inverted ETFs to profit on the way down.
The biggest trick with this statement is what it really takes to break above and stay above.
As you can see on the S&P 500 year-to-date chart, there have been a few times where we broke above 200 days and then failed. So it’s hard to see why things would be any different at this point with the economy on the brink of recession.
Then you feel like there could easily be a FOMO rally to close out the week, followed by a hangover and pullback next week as investors see through the reality of the situation. Therefore, I will find it difficult to enter a rally that doesn’t go on until next week, as this action may well be the last gas of a sucker rally for the next leg down. Again, see the chart above and appreciate how many times this happened earlier this year… and could easily have happened this time.
All things considered, the fundamental investor in me still strongly foresees a recession and a deepening bear market in early 2023. On the other hand, the trader in me hates being on the wrong side of the 200-day moving average. stand and won’t fight that tide for long.
So we’re at a critical juncture where I’ll probably be sitting on my hands on Monday at the earliest…maybe longer.
Please remember that the main purpose of my comment is NOT for you to agree with me. That is of course a plus. But really I just want you to be 110% clear on my market outlook and why it leads to the steps taken in my recommendation services; Reitmeister total return and POWR value.
If you agree, feel free to follow my trading plan.
If you don’t agree, do what makes sense to you.
Just remember my advice from August, when the market had an ill-fated 18% bear market rally above 4,300 before collapsing back to reality:
“What’s worse than going short during a bear market rally is switching to bullish at the end and doubling your woes as the market goes back down. (Read this section again so that it sinks in).”
What to do now?
Discover my special portfolio of 9 easy trades to help you generate profits as the market is likely to fall back into bear market territory.
This plan has worked wonders since it went into effect in mid-August, generating hefty gains for investors every time the market crashed.
And now is a good time to reload as we face another bear market rally before stocks hit even lower lows in the weeks and months to come.
If you successfully sailed through the investment waters in 2022, you can ignore it.
However, if the bearish argument shared above has you curious about what happens next…consider getting my update”Bear Market Game Planwhich details the 9 unique positions in my timely and profitable portfolio.
Wishing 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 Stocks. Year-to-date, SPY is down -13.17% versus a percentage increase in the benchmark S&P 500 index over the same period.
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 investing experience in the Reitmeister Total Return Portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.