The recent stock market rally (SPY) has been impressive. But it’s still officially a bear market, and there are 5 reasons why bears won’t be waving the white flag anytime soon. Let’s review why stocks are rising…why they might stall at this level…and 5 reasons why the bearish thesis might win. Read all and more in the comments below.
(Please enjoy an updated version of my weekly review in the Reitmeister Total Return newsletter).
For 2 months, the stock rally has barely abated. A large part of this is because stocks can easily ” climb the wall of worry ” Caused by the initial drop into bear market territory.
That means it’s easy to find enough silver linings, or that things aren’t as bad as advertised, for the stock to bottom out of the recent rally. However, as we now find out… All good things must come to an end.
means that the investor ended up at the 200-day moving average of the S&P 500 (SPY) at 4,326 to resistance, and quickly retreated from that mark to the finish line on Tuesday. Expect this level to represent a recent high for the market as we may be entering a period of consolidation followed by a trading range.
why? What are the parameters of this trading range? What would cause us to break out of the range?
All of this and more will be the focus of this week’s Reitmeister Total Return review.
Technically… we are still in a bear market. This has undoubtedly puzzled many investors given the weeks of price gains. So let me explain it to you all.
A bull market is defined as when you come out of a bear market and go up 20% from the bottom. Well, the near-term bottom for the S&P 500 (SPY) was 3,636.87, but today we closed at 4,305.20, 18.38% above the low.
Go ahead and call it a bear market because it’s nearly 20% above the low. However, I think it’s an important distinction that helps build a real battle for the soul of this stock market.
Bulls have really had the upper hand for the past two months. But a lot of it was just “ Climbing the Wall of Worry ” as a market for many days. That’s where the mood is so bad that whenever things get worse than the dire situation, it triggers a backlash. Once the rally starts, you get the FOMO part and people are afraid of missing out on the upside potential.
It’s one thing to say things aren’t that bad. Enough to push the bull market back into full swing. That’s why the 200-day move at 4,326, also known as the long-term trend line, provides a very interesting battleground for investors.
Check out Tuesday’s intraday chart below to see how the stock hovered around the 200-day moving average before quickly reversing:
I firmly believe that there is not serious enough bullish sentiment at the moment to Breakout of the 200-day moving average. The bears, on the other hand, have more evidence to back their case. This creates the perfect environment for periods of consolidation and trading ranges.
Yes, the relationship between high inflation and subsequent recessions/bear markets is very strong, as shown in the chart below:
However, this is where the weak job market and/ Or before corporate America’s earnings conference…then it’s hard to come up with a serious reason to push prices lower. Therefore, the tug-of-war between bulls and bears should now begin.
The top of the range should be the 200-day moving average at 4,326, while the bottom of the range could be the 100-day moving average at 4,100.
Reality, why are you stubbornly calling for a bear market when other investors have spoken out given the recent rally Strength of?
Because I have a background in economics. High inflation comes with recessions and bear markets like peanut butter and jelly. As you can see in the image above, it’s really just a matter of time. So it may not have happened yet, but the problem is still prominent.
Second, we have an inverted yield curve, one of the most tried-and-true indicators of a looming recession and bear market. Why? Because bond investors say they believe a recession is deflationary in nature over the long term. So interest rates in the future will be lower than they are now.
Third, the Fed is feeling a little too good about the economy, and they are using this as the green light for crazy rate hikes in the coming months. Bond investors have weighed the concept with an inverted yield curve, which means they think the Fed will help trigger a recession. Equity investors may receive the memo again once they see damage to employment and/or corporate earnings.
Fourth, the weekly jobless claims report is a leading indicator of future monthly job gains. This has been going in the wrong direction since mid-March. Note that it is widely believed that once weekly jobless claims exceed 300,000, that’s when the unemployment rate starts to weaken. That wake-up call may not be that far off in the future.
Fifth, this feels like a long bear market from 2000 to 2003 that started with a valuation bubble burst and then had to deal with a recession. That’s why you’ll see in the chart below, it went through About 3 years of declines, then a seemingly impressive rally, then more declines, culminating in a truly durable low in March 2003 before a healthy new bull market emerged.
Can this bear really live 3 years?
Maybe. Maybe not. But I’m just saying the battle isn’t over, which is why I think the stock will stall at these levels, waiting for some clear catalyst for a convincing breakout in the bullish or bearish direction.
My money is clearly bearish for the reasons above. But in fact, I’m open to a bullish premise to win the day. This is why our hedging strategy is currently correct. This is an equal distribution of inverse ETFs and long stock positions.
As stated in Monday’s trade alert:
“If we Really happy to break above the 200 moving average and have more bullish reasons then we will start selling our inverse ETF and start adding more stocks.
On the other hand, if my argument is correct, this is a Long term bear market, we start to retreat, and then we’ll do the opposite. That is, sell stocks, and possibly add more inverse ETFs. Proof of that may come back below 4,000.
You can simply think of hedging as the start of a tug-of-war that is evenly matched. Whichever side starts to lead…then we jump on the bandwagon and join the winning team.”
I think the last paragraph pretty much says everything, leave it there for now.
What do you do next?
Find my The hedged portfolio has exactly 10 positions to help generate gains when the market pulls back into bear territory.
This is not the first time I have used this strategy. In fact, I did the same thing in March 2020 during the coronavirus outbreak, producing a +5.13% return in the same week the market plunged nearly -15%.
If at all believing this is a bull market…then feel free to ignore it.
However, if the bearish arguments shared above do make you curious about what comes next… then consider getting my ” Bear Market Game Plan ” which includes details of my hedged 10 positions portfolio.
Click here to learn more>
I wish you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO of Stock News Network and Editor of Reitmeister Total Return
SPY shares were up $0.12 (+0.03%) in after-hours trading Tuesday. Year-to-date, the SPY has lost -8.86%, while the benchmark S&P 500 has gained % over the same period.
About the author: Steve Reitmeister
Steve was called “Reity” by the StockNews audience. Not only is he the company’s CEO, 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 recent articles and stock picks.
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