It’s easy to appreciate the confusion for investors right now. Just when you think the bears are back in charge…here comes a big 3 day rally that calls it all into question. But why did stocks rally? And why are most signs still bearish? And why does Steve Reitmeister think 3,000 to 3,200 is the most likely destination for the S&P 500 ( SPY ) this year? The answer to these vital questions and more awaits you in this timely market commentary below.
Stocks enjoyed a nice post-Labor Day rally to end a 3-week losing streak. This comes after some good news on the economy.
Unfortunately, there are two ways to look at this good news. And the other way is quite negative and so the concerns of further downside are still high.
We’ll look at these recent catalysts and what it predicts for future market conditions in this week’s commentary.
First the facts.
After several sessions below 4,000, shares rallied on Thursday and pushed even higher on Friday to close at 4,067. That completes a three-week sell off since mid-August, when the S&P 500 ( SPY ) topped 4,300. However, we are still well above the June lows of 3,636.
Now an opinion.
I believe we are finding a new equilibrium at these levels balancing the upside and downside possibilities. So I don’t think we’re going to go much higher…nor much lower in the near future. More of a trading range scenario should emerge as investors await new events that would change the bull/bear odds.
You already know I’m negative for reasons stated over and over in my recent comments. So I’ll spare you from remembering all that logic right now.
However, I want to make it clear that being profitable is more important to me… than being proven right. This means that if new evidence emerges that is decidedly bullish…I would gladly lose my current coat and become a raging bull in seconds.
This last point is important to understand so that you understand that I am not needlessly bending the facts on a downward slope. I’m just trying to share that there really is more than one way to see the latest newsbytes.
Let’s start with the drop in energy prices that reached $125 just a few months ago and are now in the low to mid $80s. The good news should be obvious to everyone since energy is so important to the inflation equation. So if prices are falling so much so soon, then maybe the Fed doesn’t have to fight so hard to tame inflation.
Now let’s look at the other side. Prices are NOT falling due to current supply/demand dynamics. Rather it is the energy speculators who are driving the price down on their worries about a future recession. And yes, a recession naturally means lower demand which leads to lower prices.
If these energy traders are right, then more pain is in store for the overall economy. It means recession. And indeed, recessions and further declines in stock prices go hand in hand, like peanut butter and jelly.
Let’s now look at the still strong employment picture. I had recently discussed how weekly jobless claims were potentially showing cracks in the strong employment institution as the number of weekly claims rose steadily since March.
Well, in recent weeks that trend has reversed with jobless claims heading lower. This likely means that job gains in the economy will again be strong for the August reading.
This shows another double-edged sword similar to the one I shared with lower energy values. On the plus side, the labor market may be strong enough to handle the nasty higher rate medicine from the Fed. So, if they can tame inflation without really hurting the labor market, then a soft landing will indeed have taken place that would lead the bulls into the races.
On the other hand, this healthy jobs picture may encourage the Fed to raise interest rates more aggressively than necessary. And once the ball starts rolling on weaker employment, it generally keeps rolling in that direction. This comes to light when you consider this vicious cycle:
Fewer jobs > less revenue > less spending > less profit > more job cuts
And the cycle continues in a rinse-and-repeat fashion for a long time, leading to a deeper recession…and steeper declines in stock prices.
Let’s go back to Fed Chairman Powell’s comments from Jackson Hole. Raising rates will cause pain…and hurt the employment picture.
No it can… I WILL.
In this case, we should consider the Fed because, if anything, they lean more bullish than pessimistic with their comments. So if you are told that pain is on the way…you better believe it.
This is why I remain bearish even after this recent round of potentially good news…and the recent rally in stock prices. Clearly the esteemed folks at Blackrock feel the same way with the comments below:
“The Fed will be surprised by the damage to growth caused by its tightening, in our view. When the Fed sees that pain, we think it will stop raising rates. It will be too late to avoid a contraction in the economy.” activity until then. think, but the tapering won’t be deep enough to bring PCE inflation down to the Fed’s 2% target… This is a big deal. We believe that returning inflation to the central bank’s targets means crushing demand with recession. This is bad news for risk assets in the short term.”
In case you weren’t clear… stocks are indeed risk assets. So is crypto, so don’t get carried away by today’s rally. Probably much more downside to this party that is typical after a bubble is formed.
Back to the topic…
Remember that bull markets don’t go straight up. We have many down days…weeks…or even months mixed in. However, we all still believe that the main long-term trend is up.
The same is true during a bear market in reverse. 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 midst of a long-term bear market.
Given the evidence at hand, I’m still bearish, but I reckon all this downside to the S&P’s ( SPY ) final low won’t unravel quickly or easily.
Instead, I suspect we’ll be a bit more limited in scope in the near future. Maybe upside to 4,100 range…maybe downside to 3,855 (20% downtrend line from all-time highs).
And that’s the trading range represents a fair balance point for people to consider what’s next. And how much will it take the Fed to raise interest rates to tame inflation. And how much damage this will do to the economy and stock prices.
The less painful this picture, the more bullish 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 likely lead to a recession…and lead to a wider and deeper bear market than we have seen so far.
This last one is what I currently rely on…and it explains the trading strategies I’ve used in my trade alert services.
What should I do next?
Discover my hedged portfolio of exactly 10 positions to help generate profits as the market descends back into bear market territory.
And yes, it’s done wonders since the Fed made it clear there’s more pain ahead, which had stocks falling from recent highs above 4,300.
This is not the first time I have used this strategy. In fact, I did the same thing at the start of the Coronavirus in March 2020 to generate a return of +5.13% the same week the market crashed -15%.
If you are fully convinced that this is a bull market…then feel free to ignore.
However, if the reductive argument shared above makes you curious about what happens next…then consider getting the “Bear Market Game Plan” which includes details of the 10 positions in my hedged portfolio.
Click here to learn more >
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
Shares of SPY traded down $0.10 (-0.02%) in after-hours trading on Friday. Year-to-date, SPY is down -13.76%, versus a % gain for the benchmark S&P 500 over 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 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 latest articles and stock picks.
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