It is now clear the summer bear market rally is over. Now we are descending back into bear market territory with a retest of the S&P 500 (SPY) lows at 3,636 a very likely occurrence. But is that bottom or might we be in store for even more pain? 40 year investment veteran Steve Reitmeister shares his view along with a trading plan to carve out gains as the market likely falls much, much further. Read on below for full details.
In a war both sides fight over every inch of soil. Anything lost in a previous battle you try to win back in the future.
Often the movement of the stock market is quite the same. That being where we often retest and reclaim key price levels. In this case, stocks have now given up the majority of the gains from the surprising 18% rally from the June bottom with a likely retest of that level coming in the near future.
Why is this happening?
Short answer is that it never stopped being a bear market and the 18% rally was nothing but a 2 month detour from reality. The longer answer, along with market outlook and trading plan is shared in the updated commentary below.
The S&P 500 (SPY) tumbled into the finish line this week as poor economic data coupled with a FedEx earnings warning crippled stocks. It appears we are now retracing our steps back to the June lows…and probably lower.
One of the reasons for that was the shocking bad FedEx earnings report. Typically no single company will move the market this much. However, in the case of FedEx it is a great proxy for the health of commerce with far reaching ramifications.
So with a 40% earnings miss + removal of guidance because the outlook is so bad and unmeasurable + CEO saying worldwide recession coming = investors headed for the hills.
Back to the part about bad economic data this week…
Well, the slate of reports on Thursday alone made the Atlanta Fed GDPNow model tumble from +1.3% to only +0.5% for the current quarter. Note that back on 9/1 that model was pointing +2.6% GDP growth. That is falling very far…very fast, which is most certainly not a positive for what comes next as typically these things are a statement of momentum…and it is picking up to the downside.
The most interesting part of what we learned on Thursday is that retail sales were ONLY up because of inflation…but since growth lower than inflation, then net-net shows weakness in demand. This along with more bad news on imports/exports had GDP estimates diving…and share prices heading lower once again.
As if the fundamentals aren’t bad enough, the Thursday close below 3,908.19 for the S&P 500 (SPY) equated to a new Sell signal from the famed technicians at TheDowTheory.com. Their bearish calls are pretty much the best in the technical analysis business.
There is not much else to report between now and Wednesday as investors await the Fed rate decision. Will it be 50 or 75 points?
WHO FREAK’IN CARES!!!
The myopic short sightedness of most investment news is criminally insane. Thus, please pay no heed to price action that day. The only thing the Fed could say to get the bulls back firmly in charge is that rate hikes are over and the war over inflation has been won.
But that is not going to happen. Not even close.
That’s because the Fed already told us just a couple weeks back from Jackson Hole that is NOT in the cards. And that we have a long term fight to beat down inflation and it WILL cause more economic pain.
And yes more economic pain means worse that the +0.5% GDP estimate for Q3. It means likely recession which includes rise in unemployment. That is not being served up at this moment but will likely take top billing in the months ahead. And with it the bear market should press lower.
Now let’s talk about key price areas on the way down for the market/S&P 500 (SPY):
3,855 = 20% down line from the all time highs. Meaning the point that separates bull from bear territory. That came into play today with some support and little bounce at the finish line. Yes, it may provide support a little while longer…but no doubt going to fold in due time.
3,636 = the June lows. Rarely can you have a bear market without retesting the lows. So that is likely the next point of support as we explore the true depths of this bear market.
3,373 = 30% down from the all time highs. Likely there will be some folks starting to bottom fish around there. I may do that as well.
3,180 = 34% decline from the highs which is in line with the average decline of a bear market.
3,000 = Very interesting psychological level of support. It may be hard to go lower than that unless it truly feels like a much worse than normal recession. And yes, we may never make it down here as there will be a lot of buying activity between 3,180 and 3,373.
Note that valuations got stretched on the way up in this bull market (thanks to ultra low bond rates making stocks so damn attractive). Since true, then indeed stocks may have to fall further than average to find bottom.
That could be a trip down to just 3,000. Maybe a touch lower.
Just remember that NOBODY rings a bell at the top or bottom. It will not be easy. And will be hard to do in the moment because we will want to start bottom fishing when everything looks terrible (economy…price action etc).
But indeed with the stock market it is always “darkest before the dawn“.
Or simply it becomes Warren Buffett time to…”be greedy when others are fearful“.
You now understand why the bias has pushed bearish once again. And yes, you also understand from the 18% July/August bear market rally that the road to bottom will not be easy. It requires patience and discipline.
It also requires a plan which we have and will continue to refine as the facts dictate. Meaning we will adjust our plan accordingly with conditions.
What To Do Next?
Discover my hedged portfolio of exactly 9 positions to help generate gains as the market descends back into a bear market territory.
And yes, it has worked wonders since the Fed made it clear there is more PAIN ahead which had stocks tumbling from recent highs above 4,300.
This is not my first time employing this strategy. In fact, I did the same thing at the onset of the Coronavirus in March 2020 to generate a +5.13% return the same week the market collapsed -15%.
If you are fully convinced this is a bull market…then please feel free to ignore.
However, if the bearish argument shared above does make you curious as to what happens next…then do consider getting my “Bear Market Game Plan” that includes specifics on the 10 positions in my hedged 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 shares rose $1.49 (+0.39%) in after-hours trading Friday. Year-to-date, SPY has declined -18.22%, versus a % rise in the benchmark S&P 500 index during 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 firm, 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 picks.