I was not the first guy to get bearish in 2022, but by May I got the memo just in the nick of time. This led to a major shift in my portfolio that allowed me to profit on the way down. And I have been steadfastly bearish since.
But just like the Fed, my outlook is “data dependent”. And recent data has me becoming less bearish. Note that is not the same thing as becoming bullish.
Why the change of heart? And what does that mean for trading strategy going forward?
Read on below for the full story...
Market Commentary
First, let’s start with some important terminology. Less bearish is quite different than being bullish.
Imagine that I previously saw 80% odds of bear market and lower stock prices in 2023. Thus, only a 20% possibility of bull market.
Given recent information my view has shifted down to about 65% bearish probability versus 35% bullish. That is nearly 2 to 1 in favor of bear market forming...just a notch less bearish than before. The next logical question is...
Why still bearish?
You have already me talk non-stop since last May about all the reasons to be bearish. That is overflowing in my article archive. Plus my most recent presentation puts that all into perspective in a nice concise way: Stock Trading Plan for 2023.
Now we are going to flip over this coin and talk about the bullish view. It is hard for me to say it in a straight forward manner. Instead, I am going to flush out all the individual ideas that point in a bullish direction...the sum total of them is still less likely than the bearish thesis playing out.
Employment is Too Strong: That was on full display Thursday when Jobless Claims went even lower to 186,000 claims. You can not have a recession without job loss. That is why the first half of 2022 was not labeled a recession even though we had 2 straight quarters of negative GDP.
So yes, we all see the headlines about job cuts at some high profile tech firms. But overall there are far too many job openings which is why the unemployment has been going lower...not higher. The trends in jobless claims say that is not going to change anytime soon as you usually need claims over 300,000 to make the unemployment go up.
To put it together, we may very well have an economic contraction coming soon, but it likely will barely effect employment...and thus increases odds of a soft landing for which stocks don’t need to fall further.
Break Above 200 Day Moving Average: For as much as I rely upon the fundamentals, I have learned to pay close attention to the 200 day moving average for the S&P 500 (SPY). We broke above on 1/19 and have only rallied higher since then. 6 straight closes above and 100 points north of the mark seems to confirm the breakout for now.
“As January Goes...So Goes the Rest of the Year”: This is another one of those classic investment sayings that does have a bit of truth behind it. Not just the 6% gain for the S&P 500 on the month, but the very Risk On nature of the groups leading the way. So if the saying holds true it means more of the same in 2023.
Less Bad = Good: This notion comes from the idea that expectations are incredibly low for the economy and corporate earnings. Lower hurdles like these make it easier to impress investors where things being less bad than expected is all it takes to bid up stock prices.
Too Many Bears: Have you ever noticed that investor sentiment is a contrary indicator? The more bullish people feel = optimism too high = greater odds of downside to follow.
The same is true in reverse. When folks are too bearish...then too often the opposite happens. And indeed this is the most widely expected recession and bear market that I can remember. That increases the odds that the opposite will play out. This also fits in with the time honored notion that “the market climbs a wall of worry”.
Fed Pivot on 2/1?: The Fed is a slow and deliberate group. And given statements in the past, and all throughout January, they will continue to raise rates into the future.
However, any softening in their language to acknowledge that inflation is moderating and just maybe they do not need to stay hawkish for as long as previously stated could well be the final nail in the bearish coffin with more upside to come. That is because it increases odds of soft landing.
Note that the absolute opposite could happen and that firmly hawkish statements would stop this rally in its tracks with significant downside to follow.
I realize that after reading these 6 reasons to become bullish that it may sound like a convincing argument. Thus, I bring your attention back to the statement at the top where I still see 65% likelihood of continuation of the bear market with new lows later in 2023.
That is because there is at least 6 more months of restrictive Fed policies ahead...plus the 3-6 months of lagged effect of these policies equals a lot more time for a full blow recession to take root. And thus plenty of opportunity for unemployment to finally worsen.
This is the Pandoras Box of the economy. Once that PAIN starts to roll out then everyone becomes more fearful of their job security. This leads to more saving and less spending which further weakens the economy with more job layoffs as a consequence.
If we can truly avoid this vicious cycle, and enjoy a soft landing, then yes, the bull market starts now. The odds of which will keep moving with each new economic fact in hand.
Again, my reading of all of this is still 65% likelihood of recession and deepening bear market. However, am prepared to adjust more bullish if the preponderance of the evidence swings in that direction.
The next key piece of evidence comes on Wednesday 2/1 when the Fed has their rate decision and announcement. That could be incredibly bullish...incredibly bearish...or incredibly uncertain.
I will do my level best to decipher it all for you in next week’s commentary. Just make sure that your mind is open to all new facts as they roll in because the most dangerous thing with investing is to only listen to evidence that proves your point and ignoring the rest.
We are investors. Not bulls or bears.
Yes, there are times we are feeling more bullish or bearish. But that label should never be affixed to you as a point of identity as it could become too permanent stopping you from switching gears for the betterment of your portfolio.
Right now we all need to be flexible to review the facts with as open a mind as possible.
Stay tuned more updates and associated trades as these facts roll in.
What To Do Next?
Watch my brand new presentation: “Stock Trading Plan for 2023” covering:
- Why 2023 is a “Jekyll & Hyde” year for stocks
- 4 Warnings Signs the Bear Returns in Early 2023
- 9 Trades to Profit on the Way Down
- Plan to Bottom Fish @ Market Bottom
- 2 Trades with 100%+ Upside Potential as New Bull Emerges
- And Much More!
Watch “Stock Trading Plan for 2023” Now >
Wishing you a world of investment success!
SPY shares fell $0.09 (-0.02%) in after-hours trading Friday. Year-to-date, SPY has gained 6.08%, 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.
6 Reasons to Become Bullish Now StockNews.com
