As fast as the S&P 500 (SPY) fell in September, it has recovered just as quickly to start in October. But with inflation still raging and the Fed likely to keep raising interest rates, which is also hurting the economy… it’s going to be hard to turn long-term bullish at this point. So let’s discuss what all this means for the market outlook… trading plan… and the best choices to take advantage of in the weeks and months ahead.

(Enjoy this updated version of my weekly commentary from the Reitmeister Total Return Newsletter).

The bear market was reconfirmed in September as the market retested the June lows… and then found lower lows.

Before you know it, October will start with a two-day “tear your face offrally that leaves investors scratching their heads over primary demand…

Are we still in a long term bear market or has the new bull market started?

We’ll explore this central concern for investors along with an appropriate trading plan in this week’s Reitmeister Total Return commentary.

Market Commentary

The longer and much more eloquent version of this stock market talk came about in my Updated: Bear Market Game Plan webinar where I discussed:

• 3 reasons why is STILL a bear market
• How low do stocks go?
• 9 choices to take advantage on your way down
• How to fish for the next bull market
• And much more

Watch it here >

You could see this early October jump coming from miles away. Stock prices have been falling for six straight weeks, causing a nearly 16% drop in the S&P 500 (SPY) from the end of the foothills rally in mid-August to Friday’s lows.

This caused the market to be oversold in the short term, giving active traders a chance to get in and have fun playing a quick bounce. But until we see the true depths of the economic pain that will come as the Fed works hard to curb inflation by proactively raising interest rates to slow the economy, it’s hard to believe we’ve hit the bottom.

We may have had a taste of what’s to come on Monday with the release of the ISM Manufacturing report which dropped from 52.8 to a post Covid low of 50.9. That is hardly in an expansion area. And as you can clearly see from the chart below, the trend is not favorable.

Worse, the forward-looking New Orders business slipped into contraction territory at 47.1. This forecasts even lower economic activity in the manufacturing sector in the coming months.

Remember that manufacturing often “the canary in the coal mine of the economybecause it often shows weakness before destroying the larger service sector. (Note that ISM Services is out this Wednesday).

One more thing to point out in this annoying report… the employment index dropped all the way from 54.2 to 48.7. This is one of the first signs of weakness in the labor market, which has remained surprisingly robust even after two consecutive quarters of negative GDP growth.

It will be interesting if any of those employment vulnerabilities show up in the ADP Employment report on Wednesday or the Government Employment Situation report on Friday. Recall that the Fed has said that their actions to raise interest rates WILL lead to a weakening of the labor market in the long run. It’s just a matter of when it appears in these monthly reports.

But again, here’s the note I shared with POWR Value members this Friday about what might happen with the monthly government employment report:

“Oddly enough, this report could be negative no matter what. If it’s too strong, as with Jobless Claims last Thursday, it could scare investors that the Fed will be overly aggressive with rate hikes. On the other hand, if it starts to show weakness, it increases the likelihood of a recession and thus the bear market’s downward trend.”

Now let’s shift our focus to another potential catalyst for the overall market in the coming weeks. I’m referring to the October earnings season that starts in the middle of the month.

The early preview of companies reporting early is nothing short of awful. This includes a terrible showing for FedEx, which is a pretty good proxy for international trade.

This could finally be the quarter where Wall Street gets the wake-up call that leads to massive cuts in its earnings outlook. And yes, that should of course lead to a fall in stock prices, since earnings prospects and price are so closely linked.

This is what my friend Nick Raich from EarningsScout.com had to say about the earnings this morning:

• Sixteen S&P 500 companies reported their quarter-end in August.
• Their next quarter (i.e. 4Q 2022) EPS estimate changes are the worst we’ve measured since the economy was shut down due to Covid in 2020.
• Steep cuts at CarMax, FedEx, Micron and Nike are the main culprits for the negative revisions.
• In addition, the stock prices of five of the 16 reported companies were down more than -20% after the results were released.
• The trends in the revisions of early reporters’ EPS estimates reinforce our prediction that the worst cuts in the S&P 500 EPS estimates are not over.
• Stay underweight equities until we can determine when the worst cuts will happen.

Finally, let’s get back to the subject of price action. Yes, it was time to bounce higher even though few people believe the bear market is over. So now the question is how much we can bounce before we go back to testing the lows.

Here are some of the key points of resistance above us right now that could stop this bounce in its tracks:

3,855 = bear market dividing line (20% below the all-time high of 4,818 for the S&P 500 (SPY)

3,961 = 100 day moving average

4.002 = 50-day moving average + major psychological resistance at 4,000

4.203 = 200 day moving average

The moving averages continue to change on a daily basis and so the final test of those levels will be at slightly different prices than stated above. However, I don’t believe we have yet another test of conviction, as we did in August, where we hit the 200-day moving average before the bears started again.

I feel like 4,000 will probably be the lid on this move…if not lower.

Yes, some will want to trade these short-term ripples in the market, but I think that’s often a “silly message”. This means that when the primary trend is bearish, all rallies are living in borrowed time as just about anything can happen to make the mood bearish again.

This means that we will stick with our current portfolio strategy which has been developed for us to explore lower lows. With probably a bottom somewhere between 3,000 and 3,200.

So let the bulls have their fun for a few days. We know why the fundamentals point to a bear market. And given history how low we are likely to go. So we can be patient to let it unfold in due course.

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 +4.65% as the S&P 500 (SPY) 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 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 traded at $377.77 per share on Tuesday afternoon, up $11.16 (+3.04%). Year-to-date, the SPY is down -19.54%, 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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