This nearly 9% rally for the S&P 500 (SPY) from the recent bottom was impressive indeed. On the downside, the 18% rally was back during the summer, fading before hitting new lows. THIS TIME WILL BE NO DIFFERENT! This article explains why and how to prepare your portfolio to make a profit even if the market falls again.
Stocks have continued to rally this week, even despite very weak gains from many leading stock prices.
Because… that’s why.
Remember that a rally in the middle of a bear market makes no more sense than a correction in the middle of a bull market. They can happen at any time and for any reason.
The key is to realize that the long-term trajectory is unchanged and we have not yet seen the lows of this bear market cycle.
How much higher can this current rally go?
That will be the focus of this week’s commentary.
Let’s start with the year-to-date chart for the S&P 500 (SPY):
I also layered on the 3 main moving averages:
Red = 50 days = 3,842
Green = 100 Day = 3903
Blue = 200 days = 4.113
The first thing you notice on the chart is how many failed rallies there have been this year before hitting new lows. That includes the seemingly impressive June-August 18% rally that attracted many investors, then spit them out with a move to new lows.
This rally will also fail. Probably next week for 2 good reasons.
First, we are currently opposing the 100-day moving average. We could easily run out of steam at this level, especially given the way we ended the week.
That’s a TERRIBLE earnings report for Amazon (on top of the bad news from Meta and Google) that definitely has broad meaning for the economy going in the wrong direction. That Amazon report sent stocks plummeting on opening, only to drastically reverse the price and end the session with a roaring rally of +2.46%.
That type of reversal is very common for the last throttle of a rally before going the other way. This means that buying pressure may be exhausted and difficult to break above resistance near the 100-day moving average (3,903).
Second, and more importantly, next week brings the most vital economic reports for November, starting with ISM Manufacturing on Tuesday. This will be followed on Wednesday by the Fed’s rate decision with another hike on the way. When we go home we have ISM Services on Thursday and then Government Employment on Friday.
Note that Monday’s Flash PMI report already confirmed weakening conditions for both manufacturing and services. (49.9 and 47.3 respectively…both below 50 signify contraction). This bodes ill for the more widely followed and market-moving ISM versions of this report.
In addition, we are likely still in a world where almost everything that happens next week is negative for equities. Even positive economic news would signal more inflation in our future, pointing to a more aggressive Fed. So I expect the recent rally in the bear market to weaken and investors to get back into a sell mood.
From previous comments I have shared the opinion that the likely bottom of this bear is somewhere around 3,000. And if things fall into their typical bear market pattern, they will in the first half of 2023, just as the economy is likely to find the depths of recession.
Yes, it’s possible that stocks could continue to rally a little longer, like the illogical mid-summer rally before new bear market lows were established.
Berenmarkt rallies become “suckers rallies“for a reason.
So the word for the wise is…don’t be a loser.
Expect this rally to die out as early as this week. But probably no higher than the 200-day moving average of 4,100 that ended the last rally.
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, delivering solid gains to investors as the S&P 500 (SPY) plummeted.
And now is a good time to recharge as we hit even lower lows in the coming weeks and months.
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.
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. Year-to-date, the SPY is down -17.15%, 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.