Most technicians would tell you that recent market activity is showing classic signs of capitulation. That being when the selling pressure of the market is flushed out in dramatic fashion giving rise to stocks in the days that follow.
The vital thing that is never clear at first with a capitulation is whether it means disaster averted and right back to bull market conditions...or is it a temporary bounce with more pain ahead???
Contemplating these divergent outcomes will be the focus of today’s Reitmeister Total Return commentary.
Market Outlook
Let’s set our sights on the key number at this time. 4,918 for the S&P 500 (SPY).
This equates to 20% below the all time highs = the current battle we wage over whether this is a bear market or just a stiff correction.
Monday we had our first tussle with this level as we dived below and then rallied back above.
Tuesday provided yet another test as stocks started the day in glorious fashion with a 4% gain. Then tick by tick that evaporated with a late session test of that key level before closing the day at 4,983.
IMany assume that if we came this far that a bear market is most certainly in the cards. However, in recent history we made it to this tipping point in 2011, 2016 and 2018 without becoming a bear market. So yes, not crazy to think that could be the case here as well.
As the tariff plans stand now they are most certainly inflationary thus increasing the odds of recessions. Perhaps the Trump administration knows this...perhaps not.
This leads to 2 possibilities on how this plays out:
- Negotiating ploy to make every key trade partner make some kind of concessions with more agreeable tariff terms to follow. If unfolds quickly, then disaster averted and bull market soon gets back on track.
- Trump administration doesn’t understand economics and doesn’t truly appreciate that trade deficits and tariffs are two VERY different things. Stayin on this path is the road to ruin with more inflation harming consumer that greatly increases odds of a recession.
Also in the long haul it makes the US look like a bully that only motivates the rest of the world to gang up on us and remove the US dollar as the leading currency. This change would be a painful penalty for not appreciating the benefits we have enjoyed with the US dollar at the center of the world economy.
A business friend of mine based in Hong Kong says that the reaction from most folks he talked to is a big laugh that this only increases the odds of China taking the helm from the US for world trade as we are making so many unnecessary enemies at this time.
John Mauldin as per usual does a wonderful job talking about the broad tariff conversation and how there is nothing “reciprocal” about them. A good read if you have a bit more time: The Tariff Recession?
My favorite part of this article is about him saying this is not the end of the world as US corporations are so good at adapting to change. They just need to know what the true final plans are so they can make needed adjustments.
This fits in my complaints in recent commentary about the lack of transparency that generates uncertainty...and all the negative side effects of that like weakening economy and tanking stock market.
The best possible outcome now is to have meaningful capitulation bounce unfold that gives us more time to find out what happens with tariffs.
If it unfolds like scenario 1, just a negotiating play, then bull market back on where we get back to 100% invested in the best stocks according to the POWR Ratings.
If scenario #2 unfolds leading us to bear market then good to note that the average bear market lasts for 13 months culminating in a 34% average decline.
There is no cookie cutter formula to this. Sometimes shorter or longer. Sometimes shallower or deeper. The point being is that falling to around 4,000 would be the likely outcome.
If the case, then in the Reitmeister Total Return we could continue to sell off aggressive stock positions and add more to our inverse ETF holdings to make money as the market declines.
The next adventure after that is trying to figure out when bottom is starting to form and getting back to everyone’s preferred method of investing in a bullish environment.
Let’s not get ahead of ourselves.
I suspect it may take another 2-3 months to wrestle over this bull/bear debate. The key being what happens on the tariff front.
Everyone should go home...light a candle...and pray for a healthy negotiations to be on the way thus likely getting us back on a bullish track. If not, then watch out below!
Gladly we are prepared and will know what to do when the time comes.
What To Do Next?
Check out my portfolio with hand selected picks for the current market environment:
- 10 stocks to buy
- 1 stock to short
- 1 inverse ETF to make money as market falls
All the stocks have been selected using the proven outperformance that comes from our POWR Ratings stock selection model which has done 4X better than the S&P 500 since 1999.
Now add in my 44 years of investing experience seeing bull markets…bear markets…and everything between. This helps me pick the right investments for the current environment.
If you are curious to learn more, and want to see the tickers for my current 12 recommendations, then please click the link below to get started now.
Steve Reitmeister’s Trading Plan & Top 12 Recommendations >
Wishing you a world of investment success!
SPY shares fell $1.63 (-0.33%) in after-hours trading Tuesday. Year-to-date, SPY has declined -15.03%, versus a % rise in the benchmark S&P 500 index during 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 firm, 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 picks.
Bear or Bull Market? StockNews.com
