Once again, it looks like bulls are poised to take the lead for good as the S&P 500 (SPY) is about to make a major break. And that’s why I say “Stock Buyers Beware!”. That’s because this is likely another false start for bulls who don’t understand the big picture, pointing to much more bearish downside for stocks in the coming weeks and months. Read on below for the full story.
The tug-of-war between bull and bear is at another critical juncture as they battle over 4,000 combatants. The two previous skirmishes were won by the bears.
I’m referring to the big rallies that picked up steam in mid-August and early December. The hawkish Fed has always been the main catalyst in sending things back down.
Will that be the case again after February 1?st Fed announcement?
That’s the topic most deserving of our attention right now, and will be the focus of this week’s Reitmeister Total Return commentary.
The boiled down version of today’s comment can easily be labeled: Stock Buyers Beware!
That’s because price action says one thing…but fundamentals say another and the final verdict will likely come after the 2/1 Fed announcement.
Now let’s go back to the starting line by evaluating this picture of where we are now with a possible break above the long-term trendline. Also known as the 200-day moving average for the S&P 500 (SPY) in red below.
Yes, it looks like we have an outbreak right now. However, see how similar events happened in late March and late November before the bears took control again.
Chartists will also note that this is still quite bearish. First, because we are officially in a bear market. We would have to go above 4,189 to say there was a bull market.
Second, we have a series of lower highs, which is a negative trend until it is officially reversed.
To be clear, this could be the formation of the new bull market. And you should never ignore the wisdom of the crowd as it appears in price action.
Still, it’s a bit hollow to look at this without the context of the fundamental landscape. So let’s switch in that direction where we have another intersection. Those are investors focused solely on inflation (and likely future actions from the Fed) versus those who see a recession brewing.
This struggle was the focus of my last comment: Investors: Please OPEN your eyes. The main theme is that inflation is indeed falling faster than expected. But before you cheer that good news, it’s BECAUSE a recession is forming that usually causes bear markets.
That recession forecast only darkened from Monday this week with a worse-than-expected reading of -1% for leading economic indicators. Check out this quote from Ataman Ozyildrim, Senior Director, Economics at the Conference Board (who created this indicator):
“The US LEI fell sharply again in December, which remains a near-term sign of a recession for the US economy. There was widespread weakness in leading indicators in December, signaling deteriorating conditions for labor markets, manufacturing, housing and financial markets in the months ahead. Overall economic activity is likely to turn negative in the coming quarters and pick up again in the last quarter of 2023.”
Next up was Tuesday’s S&P Composite PMI Flash report, which came in at 46.6. In fact, this was a poor result, as Services, at 46.6, was comparable to Manufacturing’s dismal 46.8 result. (Remember under 50 = astringent environment).
These poor economic numbers make it difficult to be bullish right now. Even worse is that we’re head over heels for the next Fed announcement at 1/2 where they’ll likely have their “high rates for a long timemantra.
Bulls continue to jump the gun expecting a Fed pivot only to be knocked down again. Such was the case in mid-August, when the summer rally of 18% ended with Powell’s famous Jackson Hole speech, sending us to new lows in the coming weeks. Then the October/November rally picked up steam as Powell poured cold water on bullish aspirations with the higher longer-term interest rate outlook.
To be clear, the Fed is undoubtedly seeing the same signs of moderating inflation. And yet, just as clearly, there will be no change in their stance given that the higher for longer mantra was repeated ALL MONTH at nearly every Fed speech in January, including similar sound bites from Powell.
These guys purposely sing from the same song sheet. That is part of their mission to provide clarity to all market parties. And so to expect them to abandon the higher mantra for a longer mantra once the 2/1 announcement is on the verge of insane.
Yes, they will probably switch back to quarter point increases. That seems appropriate at this time. But that is very different from stopping rate hikes or going lower in time to stave off the onset of the coming recession.
To sum it up, bulls could continue to lead the price action going into the 2/1 Fed announcement. This can make stocks look like they are breaking out, with some investors drawn into serious FOMO.
However, returning to the main theme of this article, I would strongly say; STOCK BUYER ATTENTION!
Just to go bullish now that that 2/1 announcement comes in, given the facts in hand, seems rather risky. Bears still have the upper hand until proven otherwise.
If by some amazing imagination the normally sluggish and stable Fed officials make a 180-degree turn to become undeniably dovish at 1/2, by all means join the bull feast that afternoon.
Long story short, the risk to the downside is greater than the risk to the upside, which is why I remain anchored in my bearish portfolio and recommend the same to others.
What to do now?
Discover my special portfolio of 10 easy trades to help you generate profits as the market continues to slide into bear market territory.
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And now is a good time to reload as we face another bear market rally before stocks hit even lower lows in the weeks and months to come.
If you’ve successfully navigated the investment waters in the past year, you can ignore it.
However, if the bearish argument shared above has you curious about what happens next…consider getting my update”Bear Market Game Plan” which details the 10 unique positions in my timely and profitable portfolio.
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return
SPY shares rose $0.81 (+0.20%) in after-hours trading on Tuesday. Year-to-date, SPY has gained 4.65% versus a percentage increase of the benchmark S&P 500 index 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 investing experience in the Reitmeister Total Return Portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.