Bears have been in charge for 2 months and are probably going to rest for a while. So even though we’ve seen some mighty jumps this week… and we could see even more in the coming days… don’t be fooled. We still have a long way to go before the bottom is found. Why is that the case? How Much Lower Will the S&P 500 (SPY) Go? How to profit in the coming weeks? Read on below for the answers.
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This has been a very interesting week for equities. Several times the premarket activity pointed in one direction…and then the script was flipped.
All in all, we have another week of fresh lows as inflation doesn’t fade, which means the Fed needs to be more vigilant, which means a greater chance of a recession down the road, which means more downside effects for equities.
Let’s recap the week followed by what investors are likely to face in the coming weeks. This goes hand in hand with updates to our trading plan to stay on the right side of the action.
Market Commentary
Stocks again tested lows on Tuesday. This caused bulls to want to enjoy a healthy pre-market bounce on Wednesday as it looked like a good buying opportunity.
NOT SO FAST!
Next comes the Producer Price Index (PPI) report show inflation way too hot. In fact, it was the month-over-month rise that was 2x expectations that alarmed investors, as it was the first monthly rise in three months.
The report showed that inflation is popping up EVERYWHERE. It is no longer just a matter of high energy prices. Inflation has gotten sticky in just about every category you can think of.
Remember that PPI is the leading indicator of where the more widely followed CPI will be in the future. What does inflation mean?don’t quietly go into that good nightsoon. And why that healthy premarket bounce instantly evaporated with yet another test of the S&P 500 (SPY) lows in store Wednesday.
Thursday was an almost repeat of the Wednesday action. Stocks were poised for a major premarket rally, only for another too hot inflation report (CPI) to rain on everyone’s parade. This led to another big sell-off to new lows, a tick below 3,500.
From there, a big rally followed to close out the day at 3,669.91. Nothing about that bounce felt like it was built on sound logic and rationality. Everything felt like computers looking at 3,500 as a focal point and a place to have a few hours of fun.
The groups that performed better were also among the most defensive groups. The one you cling to during a bear market and lose at the start of the next bull market.
Not surprisingly, investors were splashed with cold water on Friday as they attempted to rally again, but found a very weak Retail sales report. Yes, it’s gone up… but less than inflation, which means consumer spending is slowing down.
All of the above indicates that…THIS IS NOT UNDER
Let’s not forget that the average bear market sees a 34% drop. That would equal 3,180 this time.
Let’s not forget that overall market valuations were at an all-time high before this bear market started. Yes, the overall PE for the S&P 500 (SPY) was actually a notch higher at the start of 2022 than it was at the height of the 1999 technology bubble.
Now let’s not forget that one of the things that helps find the bottom is an accommodative Fed aggressively REDUCING interest rates to help restart the economy and restart investment. But right now, the exact opposite is happening, as the Fed has an aggressive rate-raising regime in place to quell the raging flames of inflation. (Read more about that in my recent article: Hidden Reason for Bloodier Bear Market).
Long story short, NOTHING about Thursday’s bounce says the true and lasting bottom has been found. But hey, bear markets have some roaring rallies along the way.
Some short… some long…but all NOT built to last.
When investors can finally appreciate the true virulence of the coming recession and assess the full damage to earnings prospects, then and only then can we start talking about a bottoming.
So at this stage we are still waiting to appreciate the outcome of high inflation + Hawkish Fed. That will likely happen in the first half of 2023, as so far their rate hikes have by no means tamed inflation. So they have to keep pushing harder on higher rates to finally burst the economy… and thus reign in inflation.
The outlook for the next 3-6 months is still quite bearish. However, in the short term, it wouldn’t be surprising that 3,500 turns out to be a fulcrum leading to a healthy bear market rally.
No…not the same kind +18% “crazy train” rally we saw from mid-June to mid-August.
Perhaps more of a typical 5-10% rally is in the offing as bears find it a little too comfortable to hold the upper hand for that long. Please consider using one of these fateful rallies to restore your bearish strategies.
A bit like during a bull market we sing “buy the dip”. Well, during a bear market it’s the opposite where we sing”blur the rally”.
That will prove to be valuable advice as this bear market is likely to be somewhere between 2,800 and 3,200. Act accordingly.
What to do?
Discover my special portfolio of 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 +5.69% as the S&P 500 (SPY) fell -16.62%.
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 updated “Bear Market Game Planwhich details the 9 unique positions in my timely and profitable 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 fell $0.21 (-0.06%) in after-hours trading on Friday. Year-to-date, the SPY is down -23.83%, 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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