It is now clear that the summer bear market rally is over. Now we are descending back into bear market territory with a retest of the S&P 500 (SPY) lows at 3.636, a highly likely event. But is that rock bottom or can we expect more pain? 40-year investment veteran Steve Reitmeister shares his thoughts along with a trading plan to make a profit as the market is likely to fall much, much further. Read on below for all the details.
In a war, both sides fight for every inch of ground. Everything you lost in a previous battle, you try to win back in the future.
Often the movement of the stock market is much the same. That’s where we often retest and reclaim key price levels. In this case, equities have now given up most of the gains from the surprising 18% rally from the June bottom, with a likely retest of that level in the near future.
Why is this happening?
The short answer is that it never ceased to be a bear market and the 18% rally was nothing but a 2 month detour from reality. The longer answer, along with the market outlook and trading plan, is shared in the updated comment below.
The S&P 500 (SPY) tumbled across the finish line this week due to poor economic data coupled with a FedEx Earnings Alert crippled shares. It looks like we are now on our steps back to the June lows…and probably lower.
One of the reasons for that was FedEx’s shockingly poor earnings report. Normally, no company will move the market that much. However, in the case of FedEx, it is a great proxy for trade health with far-reaching implications.
So with a 40% loss of profit + removal of guidance because the outlook is so bad and unmeasurable + CEO saying global recession is coming = investors heading for the hills.
Back to the bad economic data part this week…
Well, the messages on Thursday alone made the Atlanta Fed GDPNow Model decrease from +1.3% to just +0.5% for the current quarter. Note that on September 1, that model pointed to +2.6% GDP growth. That’s going down very far… very fast, which certainly isn’t positive for what comes next, as these things are typically a statement of momentum… and it’s going up to the downside.
The most interesting part of what we learned on Thursday is that retail sales were ONLY up because of inflation… but since growth is below inflation, the net-net is showing weakness in demand. This, along with more bad news on imports/exports, plunged GDP estimates… and stock prices fell again.
As if fundamentals weren’t bad enough, Thursday closed below 3,908.19 for the S&P 500 (SPY) equal to a new sell signal from famed engineers at TheDowTheory.com. Their bearish calls are pretty much the best in the technical analysis business.
Not much else to report between now and Wednesday as investors await the Fed’s rate decision. Will it be 50 or 75 points?
WHO FREAK’IN CARE!!!
The shortsightedness of most investment news is criminally insane. So please do not pay attention to price promotions that day. The only thing the Fed could say to bring the bulls back to firm grip is that the rate hikes are over and the war on inflation is won.
But that’s not going to happen. Not even close.
That’s because the Fed told us about Jackson Hole a few weeks back that it’s NOT in the cards. And that we will have a prolonged battle to beat inflation and that it will cause more economic pain.
And yes, more economic pain means worse than the +0.5% GDP estimate for the third quarter. It means a likely recession, including a rise in unemployment. That’s not being served at the moment, but will likely get top billing in the coming months. And that should push the bear market lower.
Now let’s talk about the key price areas on the way down for the market/S&P 500 (SPY):
3,855 = 20% lower than all time highs. This means the point that separates bull from bear territory. That came into play today with some support and little bounce at the finish. Yes, it may support for a while longer…but will no doubt fold in due course.
3,636 = the June lows. Rarely can you have a bear market without retesting the lows. So that’s probably the next fulcrum as we explore the true depths of this bear market.
3,373 = 30% lower than the all time highs. Probably some people around there will start bottom fishing. I can do that too.
3,180 = 34% decline from the highs, which is in line with the average decline of a bear 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.
Note that valuations were stretched on the way up in this bull market (thanks to the ultra-low bond yields that make equities so damn attractive). As it is true, stocks must indeed fall further than average to find the bottom.
That could be a trip to just 3,000. Maybe a little lower.
Just remember NOBODY rings a bell at the top or bottom. It won’t be easy. And it’s going to be hard to do at this point because we want to start bottom fishing when everything looks bad (economy… price action etc).
But indeed with the stock market it is always “darkest before 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.
It also requires a plan that we have and will continue to refine depending on the facts. That means we will adjust our plan with conditions.
What to do?
Discover my hedged portfolio of exactly 9 positions to help generate profits if the market falls back into bear market territory.
And yes, it has worked wonders since the Fed made it clear that more PAIN lies ahead, causing stocks to plummet from recent highs above 4,300.
This is not the first time I have used this strategy. In fact, I did the same at the start of the Coronavirus in March 2020 to generate a +5.13% return in the same week the market collapsed -15%.
If you are completely convinced that this is a bull market… just ignore it.
However, if the bearish argument shared above makes you curious about what happens next… consider my “Bear Market Game Planthat contains details about the 10 positions in my hedged portfolio.
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 $1.49 (+0.39%) in after hours trading on Friday. Year-to-date, the SPY is down -18.22%, 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.