The S&P 500 (SPY) is down 15% in just a few weeks. Of course, we may see a short-term bounce here or there. Unfortunately, most signs still point lower. Why is that the case? How much lower can we go? And what is the best way to trade this market? 40-year investment veteran Steve Reitmeister provides the answers in his new market outlook below.
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(Enjoy this updated version of my weekly commentary from the Reitmeister Total Return Newsletter).
On Tuesday, we again tested the June lows of 3,636 for the S&P 500 (SPY). In fact, it fell halfway through the session, then closed just above at 3.647.
So now that we’ve retested the lows and closed above… does that mean we’ve found the bottom of this bear market?
NOT REALLY!
The reasons why we go down and follow the bear market trading plan in this week’s commentary below…
(online it automatically says “Continue reading>>”)
Market Commentary
On Tuesday, we saw some classic stock market behavior.
That’s where the market has been going down, down, down for quite some time. Next comes a big juicy morning jump to open the Tuesday session. But tap by tap it crumbles to become a loss. Even worse, we retested the June lows of 3,636 for the S&P 500 (SPY).
Note that this type of session often occurs 2-3 at the end of a bearish run before a permanent bounce follows. That’s because every higher bounce gives scared investors one last chance to sell at a slightly better price.
But notice, I said bounce…not the start of a new bull market. We’re a long way from that conversation, because we haven’t caught a glimpse of how bad the economy will get if the Fed hits the brakes hard.
This means we have to assess:
- How weak is GDP getting?
- How much unemployment will rise?
- How deep a cut in corporate earnings forecasts?
- And so how much stock valuations need to be lowered to find the bottom.
Too many investors view a bear market as an event. As a 1 time thing. Instead, it’s a process that typically takes over a year to make its way out.
Unfortunately for all of us, the most recent bear market in memory was the March 2020 Covid crash that lasted a shockingly short, but painful, 3 weeks before finding the bottom 34% lower and then another bull market.
What people forget”one out of thousandsThe bear market is that Treasury yields also fell below 0.5%, making stocks the ONLY investment game in town. That’s what caused the upswing so early, even as the global economy was rapidly whirling down the toilet.
This time we have a probable recession brought on by rampant inflation that the Fed is DEAD determined to tame. This means we have really rising rates this time around. And so investors have to weigh the value of stocks against a 10-year treasury of nearly 4%. That makes stocks much less attractive in comparison and why bottom won’t be found so quickly and easily.
Long story short, we’re still in the midst of a long-term bear market that hasn’t bottomed out yet. So let’s talk about the price action from here and how that compares to our trading plan.
I had the pleasure of writing extensively about this last week. I’ll reiterate here with some modest updates on the key S&P 500 (SPY) levels to keep the insights fresh and current:
3,636 = the June lows. Rarely will you see a correction or bear market that ends without retesting the lows. So that’s probably the next fulcrum as we explore the true depths of this bear market.
It can be hard for stocks to get below this level without seeing some of that pain the Fed was talking about. Like the labor market that is finally showing some weakness.
So if we rush down and pain isn’t on the menu yet, this will be enough support, maybe with another juicy jump. Not 18% insanity as we say in July/August. Maybe more like +5-10% pending the next economic signals.
If and when the economic pain train is underway, inventories will fall further.
(9/27/22 Update: So here we are testing those June lows again. And right now, the pain the Fed predicts for the economy is not yet clearly visible.
Maybe we’ll go lower now… like maybe 3,500 and then we’ll see a jump. Or maybe one is unfolding now.
Again, a smooth one-stop ride to the bottom is not in the cards…EVER. We will go down… then bounce… then be fleeting… and then go down again at an unspecified time. Rinse and repeat. Rinse and repeat.
Finally, right when buying stocks sounds like the worst idea ever…THAT is the bottom…and that’s when you buy for the next bull market.
Now let’s go back to the rest of last week’s price action talk that is still tremendously relevant today).
3,373 = 30% lower than the all time highs. Probably some people around here will start bottom fishing. I can do that too. Or just start taking profits on our inverse ETFs…but certainly not for long at this point given the points below.
3,180 = 34% decline from the highs, which is in line with the average decline of a bear market. Another place to make profits on inverse ETFs and bottom fishing for the eventual return of the next bull market.
3,000 = Very interesting psychological support level. It can be hard to go lower than that unless it really feels like a much worse than normal recession. And yes, we may never get here as there will be a lot of buying activity between 3,180 and 3,373. But if we’re that low, we’ll put more money into the market for the next bull’s returns. Maybe even back to fully invested.
I explain all this for 2 reasons.
First, to understand the likely downside potential and why the hedge is in place to clean up gains on the way down.
Second, to show where we might want to take profits on the hedge and prepare for the next bull market. I’ll be tempted to maybe go back to 30-40% long in that area around 3.373.
However, given how much valuations were stretched on the way up in this bull market (thanks to the ultra-low bond yields that make equities so damn attractive), they could indeed fall further than average. So if we go to 3,180, we’re probably going to get back to 50-60% long. And if it gets to 3,000 then it’s probably 100% long because the bounce off the bottom will be fast and furious.
Remember, NOBODY rings a bell at the top or bottom. It won’t be easy. And it will be hard to do at this point because we will buy when everything looks bad (economy… price action etc). But yes, with the stock market it is always ‘dark before the dawn’.
Or is it just Warren Buffett’s time to…”being greedy when others are afraid”.
You now understand why the bias has pushed bearish again. And yes, you also understand from the 18% bear market rally in July/August that the road to the bottom will not be an easy one. It requires patience and discipline as there are always fateful rallies thrown in.
It also requires a plan that we have; not only to make a profit on the way down… but to prepare for the next bull market.
Let’s go!
What to do?
Discover my hedged portfolio with 9 easy trades to help you generate profits as the market descends further into bear market territory.
This plan has worked wonders since it kicked off in mid-August, yielding gains of +4.65%, while the S&P 500 fell more than 15%.
If you have successfully navigated the investment waters in 2022, don’t hesitate to ignore it.
However, if the bearish argument shared above makes you curious about what happens next… consider my “Bear Market Game Planwhich details the 9 positions in my timely and profitable hedged portfolio.
Click here for more information >
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 were up $0.13 (+0.04%) in after-hours trading on Tuesday. Year-to-date, the SPY is down -22.61%, 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.
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