Stocks continue to bounce this week even in the face of very weak earnings from many leading bellwether stocks.
Why?
Because...that’s why.
Remember that a rally in the midst of a bear market is no more meaningful than a correction in the midst of a bull market. They can happen at any time for any reason.
The key is to realize the long term trajectory is unchanged and that we have not yet seen the lows for this bear market cycle.
How much higher could this current rally go?
That will be focus of this week’s commentary.
Market Commentary
Let’s start with the year-to-date chart for the S&P 500 (SPY):
I have also layered on the 3 key moving averages:
Red = 50 Day = 3,842
Green = 100 Day = 3903
Blue = 200 Day = 4,113
The first thing to notice on the chart is how many failed rallies there have been already this year before new lows were made. That includes the seemingly impressive 18% rally from June to August that sucked in many investors only to spit them out with a move to new lows.
This rally will also fail. Probably next week for 2 good reasons.
First, is that we are right now pressing up against the 100 day moving average. We could easily run out of steam at this level especially given the way we ended the week.
That being a TERRIBLE earnings report for Amazon (on top of the bad news from Meta and Google) that absolutely has broad meaning for the economy headed in the wrong direction. That Amazon report had stocks properly heading lower at the open only to dramatically reverse course end the session with a rip roaring rally at +2.46%.
That type of reversal is very common for the last gas of a rally before heading in the other direction. Meaning that the buying pressure may be exhausted and hard to get above resistance at 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 is followed on Wednesday by the Fed rate decision with another hike on the way. Coming down the home stretch we have ISM Services on Thursday and then Government Employment on Friday.
Please remember that the Flash PMI report from Monday already confirmed weakening conditions for both manufacturing and services. (49.9 and 47.3 respectively...both under 50 meaning contraction). This bodes poorly for the more widely followed, and market moving, ISM versions of this report.
Along with that we are still likely in a world of where most everything that happens next week is negative for stocks. Even positive economic news would be a signal that more inflation is in our future which points to more aggressive Fed. Thus, I expect the recent bear market rally to fizzle out with investors getting back in a selling mood.
From previous commentaries I have shared the view that the likely bottom of this bear is somewhere around 3,000. And if things fall into their typical bear market pattern that is happening in the first half of 2023 just as the economy is likely finding the depths of the recession.
Yes, it is possible that stocks could keep moving higher a bit longer not unlike the illogical mid-summer rally before new bear market lows were established.
Bear market rallies are called “suckers rallies” for a reason.
So the word to the wise is...don’t be a sucker.
Expect this rally to fizzle out, as early as this week. But probably no higher than the 200 day moving average at 4,100 that capped the last rally.
Invest accordingly.
What To Do Next?
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This plan has been working wonders since it went into place mid August generating a robust gain for investors as the S&P 500 (SPY) tanked.
And now is great time to load back up as we make even lower lows in the weeks and months ahead.
If you have been successful navigating the investment waters in 2022, 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 updated “Bear Market Game Plan” that includes specifics on the 9 unique positions in my timely and profitable portfolio.
Wishing you a world of investment success!
SPY shares . Year-to-date, SPY has declined -17.15%, 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.
When Will This “Suckers Rally” End? StockNews.com
