It’s easy to appreciate the confusion for investors right now. Just when you think the bears are back in charge… a big three-day rally ensues that casts doubt on everything. But why did the shares rise? And why are most signs still pointing bearish? And why does Steve Reitmeister believe 3,000 to 3,200 is the most likely destination for the S&P 500 (SPY) this year? The answer to these essential questions and more awaits you in this current market commentary below.
Stocks had a good rally after Labor Day to end a 3-week run of declines. This comes on the heels of good news about the economy.
Unfortunately, there are two ways to look at this good news. And the other side is quite negative which is why there are still concerns about a further bearish downtrend.
We’ll discuss these recent catalysts and what it predicts about future market conditions in this week’s commentary.
First the facts.
After several sessions below 4,000, shares broke back above on Thursday and moved higher on Friday to close at 4,067. This ends the three-week sell-off from mid-August, when the S&P 500 (SPY) reached 4,300. Yet we are still well above the June low of 3,636.
I believe that at these levels we are rebalancing, balancing bullish and bearish possibilities. This means that I don’t think we’re going to go much higher in the short term…nor much lower either. More of a trade range scenario should emerge as investors wait for new facts that would alter the bull/beer opportunities.
You already know I’m bearish for reasons mentioned over and over in my recent comments. So I’ll spare you the belch of all that logic right now.
However, I want to make it clear that it is more important for me to be profitable… than to be proved right. This means that if new facts come out that are decidedly bullish… I’d be happy to shed my current bear coat and turn into a raging bull in seconds.
This last point is important for you to understand so that you can understand that I am not unnecessarily bending the facts into a bearish slant. I’m just trying to share that there really is more than one way to look at the latest newsbytes.
Let’s start with falling energy prices that were just a few months ago at $125 and now in the low to mid $80. The good news should be clear to everyone, as energy is so vital to the inflation equation. So if prices are falling that fast, maybe the Fed won’t have to fight so hard to tame inflation.
Now let’s look at the flip side. Prices are NOT falling due to the current supply/demand dynamics. Rather, it is energy speculators pushing the price down amid concerns about a future recession. And yes, recessions mean lower demand, of course, leading to lower prices.
If these energy traders are right, it spells more pain for the general economy. Meaning recession. And indeed, recession and further price falls go hand in hand like peanut butter and jelly.
Now let’s look at the still strong employment picture. I had recently discussed how the weekly Jobless Claims may have shown cracks in the strong employment base as the number of weekly claims has steadily increased since March.
Well, in recent weeks, that trend has reversed with a drop in jobless claims. This likely means that job growth in the economy will once again be robust for the August reading.
This points to another double-edged sword, similar to what I shared with lower energy prices. On the bright side, the job market may be robust enough to handle the Fed’s foul-tasting, more expensive drug. So if they can tame inflation without really hurting the job market then there will indeed have been a soft landing that would have brought the bulls to the races.
On the other hand, this healthy job picture could encourage the Fed to raise rates more aggressively than necessary. And once the ball starts to roll at weaker employment, it generally keeps rolling in that direction. This comes to light when you look at this vicious circle:
Fewer jobs > less income > less spending > less profit > more jobs cut
And the cycle continues in a flush and repeat fashion for a long time, leading to a deeper recession… and sharper price declines.
Let’s go back to Jackson Hole’s Fed Chair Powell’s comments. The rate hike will hurt… and hurt the employment picture.
Not maybe… WILL.
In this case, we have to take the Fed at its word, as they are leaning towards optimism rather than pessimism in their comments. So when they tell you that pain is coming…you best believe it.
This is why I remain bearish even after this recent round of potentially good news… and the recent surge in stock prices. It’s clear that the respected folks at Blackrock feel the same way given these comments below:
“We believe the Fed will be surprised by the growth damage caused by the tightening. If the Fed sees this pain, we think it will stop raising rates. It will be too late to contract a contraction by then of economic activity, we think, but the decline won’t be deep enough to bring PCE inflation back to the Fed’s target of 2%… That’s a big problem. inflation towards central bank targets means demand is crushed with a recession, which is bad news for risky assets in the near term.”
In case you weren’t clear… stocks are indeed risky assets. So is crypto, so don’t get carried away by today’s rally. Probably much more downside to that party that is typical after bubble formation.
Back to the point…
Keep in mind that bull markets do not go straight up. We have a lot of descending days…weeks…or even months mixed up. Yet we all still appreciate that the primary long-term trend is up.
The same is true in reverse during a bear market. There will be days, weeks and months. Heck, we even endured an 18% rally from mid-June to mid-August. And yet still very much in the middle of a long term bear market.
Given the evidence available, I am still bearish, but understand that all that flip side to a final bottom closer to 3,000 to 3,200 on the S&P (SPY) is not going to unfold any time soon or easily.
Instead, I suspect we’ll have a little more reach in the near term. Maybe a rise in the range to 4,100…maybe a downside to 3,855 (20% decline line from all all-time highs).
And this trading range represents a reasonable balancing point for people to think about what comes next. And how much will the Fed need to raise interest rates to tame inflation. And how much damage will that do to the economy and stock prices.
The less painful that photo… the more optimistic things will become.
However, if the Fed is true to its word, and the majority of market forecasters are right, then it will be painful… and probably lead to a recession… and it will lead to a broader and deeper bear market than we have done . seen to date.
The latter is what I’m counting on right now… and explains the trading strategies I’ve applied in my trade alert services.
What to do?
Discover my hedged portfolio of exactly 10 positions to help generate profits if the market falls back into bear market territory.
And yes, it has worked wonders since the Fed made it clear that more PAIN lies ahead, causing stocks to plummet from recent highs above 4,300.
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 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 Planthat contains details about the 10 positions in my hedged portfolio.
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 fell $0.10 (-0.02%) in after-hours trading on Friday. Year-to-date, the SPY is down -13.76%, versus a % increase in the benchmark S&P 500 index over the same period.
About the author: Steve Reitmeister
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.