Stocks enjoyed a good post Labor Day rally to end a 3 week streak of heading lower. This comes on the heels of some good news about the economy.
Unfortunately, there are two ways to look at this good news. And the other way is quite negative which is why concerns about further bearish downside still looms large.
We will review these recent catalysts and what it foretells about future market conditions in this week’s commentary.
Market Commentary
First the facts.
After several sessions under 4,000 stocks broke back above on Thursday and pushed higher still on Friday to close at 4,067. This ends the three week sell off from mid August when the S&P 500 (SPY) topped 4,300. Yet we are still far above the June lows of 3,636.
Now opinion.
I believe we are finding a new equilibrium at these levels balancing out bullish and bearish possibilities. Meaning I don’t think we will go much higher...nor much lower in the near term. More of a trading range scenario should emerge as investors await new facts that would change the bull/bear odds.
You already know I am bearish for reasons stated over and over again in my recent commentaries. So I will spare you the regurgitation of all that logic at this moment.
However, I do want to make clear that it is more important for me to be profitable...than to be proven right. Meaning if new facts emerge that are decidedly bullish...I would gladly shed my current bear coat and become a raging bull in seconds flat.
This last point is important for you to understand so you can appreciate that I am not bending the facts unnecessarily to a bearish slant. Just trying to share that there is truly more than one way to look at the latest newsbytes.
Let’s start with tumbling energy prices that made it as high as $125 just a few months back and now in the low to mid $80’s. The good news should be evident to all as energy is so essential to the inflation equation. So if prices are coming down this much this soon, then perhaps the Fed doesn’t need to fight so hard to tame inflation.
Now let’s consider the flipside. Prices are NOT coming down because of current supply/demand dynamics. Rather it is energy speculators pounding the price down given their concerns about future recession. And yes, recessions naturally mean lower demand which leads to lower prices.
If these energy traders are right, then it foreshadows more pain ahead for the overall economy. Meaning recession. And indeed recession and further stock price declines go hand in hand like peanut butter and jelly.
Now let’s consider the still strong employment picture. I had recently discussed how weekly Jobless Claims was potentially showing cracks in the strong employment foundation as the number of weekly claims had been steadily on the rise since March.
Well in the last few weeks that trend has reversed with Jobless Claims heading lower. This likely means that job gains in the economy will be robust once again for the August reading.
This points to another two edged sword similar to what I shared with lower energy prices. On the plus side the jobs market may be robust enough to handle the foul tasting higher rate medicine from the Fed. So if they can tame inflation without truly damaging the jobs market, then indeed a soft landing will have taken place which would have the bulls off to the races.
On the other hand, this healthy jobs picture may embolden the Fed to raise rates more aggressively than necessary. And once the ball starts rolling on weaker employment, it generally keeps rolling in that direction. This comes to light when you consider this vicious cycle:
Less jobs > less income > less spending > less profits > cut more jobs
And the cycle continues in rinse and repeat fashion for a long time leading to deeper recession...and steeper share price cuts.
Let’s roll back to Fed Chairman Powell’s comments from Jackson Hole. The raising of rates will cause pain...and will harm the employment picture.
Not might...WILL.
In this case we should take the Fed at their word because if anything they lean more optimistic than pessimistic with their comments. So if they tell you pain is on the way...you best believe it.
This is why I remain bearish even after this recent round of potentially good news...and recent bounce in stock prices. Clearly the well respected folks at Blackrock feel the same given these comments below:
"The Fed will be surprised by the growth damage caused by its tightening, in our view. When the Fed sees this pain, we think it will stop raising rates. It will be too late to avoid a contraction in economic activity by then, we think, but the decrease won’t be deep enough to bring PCE inflation down to the Fed's target of 2%... That's a big deal. We think getting inflation back to central bank targets means crushing demand with a recession. That’s bad news for risk assets in the near term."
Just in case you were unclear...stocks are indeed risk assets. So is crypto so don’t get sucked in by today’s rally. Likely much more downside to that party which is typical after the forming of a bubble.
Back to the point...
Please remember that bull markets don’t go straight up. We have many down days...weeks...or even months mixed in. Yet we all still appreciate that the primary long term trend is up.
Same is true during a bear market in reverse. There will be up days, weeks and months. Heck, we even endured a 18% rally from mid June to mid August. And yet still very much in the midst of a long term bear market.
Given the evidence in hand I am still bearish, but appreciate that all that downside to eventual bottom closer to 3,000 to 3,200 on the S&P (SPY) will not unfold quickly or easily.
Instead I suspect we will be a bit more range bound in the near term. Maybe upside in the range to 4,100...maybe downside to 3,855 (20% decline line from all time highs).
And this is trading range represents a fair point of equilibrium for folks to ponder what comes next. And how much will the Fed need to raise rates to tame inflation. And how much damage will that cause to the economy and stock prices.
The less painful that picture...the more bullish things will become.
However, if the Fed is true to its word, and the majority of market prognosticators are right, then it will be painful...and will likely lead to recession...and will lead to a broader and deeper bear market than we have seen to date.
The latter is what I am banking on at this time...and explains the trading strategies I have employed in my trading alert services.
What To Do Next?
Discover my hedged portfolio of exactly 10 positions to help generate gains as the market descends back into a bear market territory.
And yes, it has worked wonders since the Fed made it clear there is more PAIN ahead which had stocks tumbling from recent highs above 4,300.
This is not my first time employing this strategy. In fact, I did the same thing at the onset of the Coronavirus in March 2020 to generate a +5.13% return the same week the market collapsed -15%.
If you are fully convinced this is a bull market...then please feel free to ignore.
However, if the bearish argument shared above does make you curious as to what happens next...then do consider getting my “Bear Market Game Plan” that includes specifics on the 10 positions in my hedged portfolio.
Wishing you a world of investment success!
SPY shares fell $0.10 (-0.02%) in after-hours trading Friday. Year-to-date, SPY has declined -13.76%, 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.
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