A month ago the bulls were claiming victory as they created a charge back over 4,000 for the S&P 500 (SPY). Since then that false narrative has been peeled away and investors are more honestly looking at the bleak outlook formed by high inflation and a hawkish Fed. That explains why we are back retesting the June lows. Now we have to ponder what comes next and how to trade our way to profits. Read on below for the full story.
I can count on 1 hand the # of times a bear market has not retested the bottom before the next bull market emerged.
It only takes 1 finger to count it…and that was the oddity of the Covid bear market that bounced ferociously from bottom in March 2020 never to return.
This is one of the main reasons that I knew the 18% suckers rally from mid-June to mid-August was a mirage. The true problems of high inflation and hawkish Fed were not yet solved. So it pointed to a future encounter where we would revisit those June lows…if not lower.
Now that we are back near those lows…what happens next?
That will be at the heart of this week’s commentary below…
Stocks flirted with support at 3,855 on the S&P 500 (SPY) for a few sessions. That was an interesting point of support because it represents 20% down from the all time highs which denotes bear market territory.
But then the Fed brought the hammer down on Wednesday with another 75 basis point rate hike and language that says expect much more to come. Perhaps the worst thing they said is how strong the employment picture looks which gives them a green light to continue aggressively raising rates with the assumption it will cause less pain.
However, investors read it correctly that the Fed will most likely inflict more pain. And that in time employment will worsen. Put that together with an ugly start to Q3 earnings season and investors are in a hurry to get back into bear territory below 3,855.
The next point of serious support is retesting the June lows of 3,636. Shocking how fast we got there as investors seemed in quite the rush to approach those levels on Friday with a session low of 3,647 before a 50 point bounce into the close.
Like I was saying even back in August with the market at 4,300, it is odd bordering on insane for a bear market not to retest the lows. Just a matter of time before it happens.
Some scoffed at that comment like I couldn’t see the new bull market forming right before my eyes. However, I am not a believer in price action as much as I am a believer 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 have endured 2 straight quarters of negative GDP growth to start the year. However, Q3 was looking pretty solid with the famed GDP Now model from the Atlanta Fed showing a potential +2.6% read for the quarter at hand. This no doubt was part of the reason for the big bounce that ensued from mid-June through mid-August.
However, ever since the start of the month the growth outlook has been slashed lower after just about every economic report. And this week after Housing Starts rolled in the GDP estimate was cut further down to only +0.3%.
The only reason it is not currently called a recession is because there is no increase in unemployment. That level of economic pain is what would cause the National Bureau of Economic Research, the official arbiters of recessions, to ring the bell.
Now let’s remind ourselves of what the Fed has been saying loud and clear. They need to crush inflation. This can only be done with a long term battle to raise rates above normal levels which WILL lead to below trend growth and WILL lead to a weakening of labor markets.
Don’t forget that the Fed has a optimistic bias. So, if they are saying these negative things will happen…then you better believe its true. And unfortunately, it will likely be even more painful than the mild picture they paint.
This is what investors have reawakened to and explains why the market is back into bear market territory below 3,855.
And why we are so quickly retesting the June lows at 3,636.
And this is why I point out that the average bear market decline is 34% which would equate to 3,180.
And this is why you should expect more downside from current levels.
Yes, there will be bounces here or there. In fact, it would not be a shocker for one to emerge soon given how quickly we are retesting the June lows without concrete evidence of serious economic pain in hand. That being a true weakening of the employment picture or an earnings recession.
FedEx’s horrible earnings a week back may indeed be foreshadowing more ugliness ahead in the Q3 earnings season. But until Wall Street analysts start predicting earnings declines (not just slowing of growth) then it is hard to say that everyone is expecting recession…and thus likely not ready to make our way to the final bottom of this bear market.
Putting it altogether the market took a 3 month detour from the June lows. And now we are once again back to a point of determining if indeed inflation + hawkish Fed equals recession.
If yes, then stocks will fall further. Probably somewhere between 3,000 and 3,200 will prove to be the bottom.
If not, then we may be in the process of solidifying bottom at this level….but don’t count on it. The much more likely scenario is recession and deeper bear market.
What To Do Next?
Discover my hedged portfolio of exactly 9 positions to help generate gains as the market descends further into a bear market territory.
Like the +3.89% gain this portfolio enjoyed since mid August as the bears have regained control.
This is not my first time employing this bearish 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 9 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 $0.29 (+0.08%) in after-hours trading Friday. Year-to-date, SPY has declined -21.63%, 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.