Holiday sessions like this week have a naturally bullish bias for stocks (SPY). That’s because the joy of Thanksgiving typically leaks over to higher stock prices. The risk is giving this upward movement any significance when the long term trajectory is still decidedly bearish. Let’s do a roll call of recent events that continues to point the compass to more downside action ahead along with our game plan to profit as stocks make new lows in the weeks ahead.
Yes, stocks closed above notable resistance at 4,000 for the S&P 500 (SPY) on Tuesday. But with more holiday sessions to go this week…then likely prices will continue to creep higher a little while long.
The key at this stage, as it comes to price action, is whether stocks really have what it takes to clear the hurdle of the 200 day moving average (now at 4,062).
Remember that this moving average (red on the S&P 500 chart below) is considered the long term trend line that really helps delineate bullish from bearish times.
As you can see that market got bearish in a hurry this year with many failed attempts to break back above. This time will be no different.
The storm clouds are forming for a recession to start in the first half of 2023 as the after effect of the Fed raising rates to tamp down the flames of inflation.
Remember the Fed has already told investors that their long term approach will come with a measure of economic pain. Whereas they “hope” to avoid a recession, they begrudgingly have to admit that it is not likely.
That message was served up loud and clear by Chairman Powell from his 11/2 press conference following the most recent 75 basis point hike. He was asked if the “window to create a soft landing for the economy had narrowed”.
The look on his face was even more powerful than the words where he admitted that with inflation barely budging at this point, that it would take a lot more Fed ammo to win the inflation battle. And thus indeed very unlikely to create a soft landing.
If no soft landing, then it means hard landing (recession).
Remember the famous words: Don’t fight the Fed!
So if they are telling you that they are far from done on their fight against inflation. And that the odds of a soft landing are closing in on zero. Then probably best to believe them and prepare for a recession which comes hand in hand with lower stock prices.
Economists surveyed by the Wall Street Journal see the odds of recession coming in the next year is up to 63% from the mid October reading. This view falsely offers a bit of hope with 37% chance of it not happening.
And now I will pull the rug out by informing you that economists have a terrible track record. That’s because the average recession has come on the scene when the average probability was only 40%. In that light you appreciate how daunting that 63% probability of recession is for our future outlook.
Wall Street analysts are also beating the recessionary drums as the most recent weak earnings season has led to a significant drop in estimates for the future. Q4 is nearing in on zero earnings growth. Whereas the first 2 quarters of 2023 are decidedly negative.
What’s worse is that earnings experts, like Nick Raich of EarningsScout.com, expect there to be even steeper cuts in the earnings outlook ahead. That’s because Wall Street is always too optimistic at the start of a recession.
The roll call of foreboding indicators continues with the Chicago Fed National Activity Index this week falling into negative territory once again. This is a fairly broad reading of the economy which is at the lowest level in 4 months. The change in trend back to negative usually points to even lower readings ahead.
Next we have the hit parade of 3 different regional Fed reports all pointing the wrong direction. That starts with the Richmond Fed reading on Tuesday going from a positive of 5 for manufacturing down to -9. Services also tipped over to negative at -3.
Thursday was no better with the Philly Fed Manufacturing index falling to -19.4. New Orders was also pointing south at -16.2 which points to more bad times ahead.
Lastly as we scan across the country to the Kansas City Fed we see the composite index (manufacturing & services) at -10.
All of this begs the question; Why have stock prices been going up for about 6 weeks in the face of such an obviously negative outlook?
Because a bear market is a long term process made with lower lows and lower highs on the bounces. Not just a smooth elevator ride to the bottom. That point comes through loud in clear with the S&P 500 price chart I shared above.
And also comes through loud and clear for past bear markets like 2008-2009 below:
And for the previous 2000 to 2003 bear market:
This recent rally will probably top out soon as foolish bulls get thwarted at the 200 day moving average.
Wise investors will appreciate the lessons from history and that you should not get bullish running INTO the recession. That is when it pays to bet on more market downside.
Once inside the recession, with stocks pressing lower, that is when it is wise start betting on bottom as the next bull market should be right around the corner. Not beforehand.
So please enjoy the holiday season. Just don’t get fooled by the optical illusion of this holiday rally.
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 market tanked.
And now is great time to load back as we deal with yet another bear market rally before stocks hit 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!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares rose $0.02 (+0.01%) in after-hours trading Tuesday. Year-to-date, SPY has declined -14.83%, 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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