I have been bearish since May 2022. However, I have to admit that the early 2023 evidence did increase the odds of a potential return to a bull market.
That party is over!
Let’s discuss the increasing evidence that bears are ready to come out of hibernation with much more downside to follow. And yes, this will come hand in hand with a trading plan to stay on the right side of action.
Market Commentary
Plain and simple, stocks rallied on a false premise to start 2023.
That being some signs of moderating inflation that could lead the Fed to end their rate hiking regime earlier than expected. This soft landing scenario compelled more investors to believe that bottom was already established and time to bid up stocks for the birth of the next bull market.
The Fed whole heartedly repudiated this idea at the February 1st meeting. They saw inflation as too sticky with no plans to change their hawkish course with higher rates in place through year end.
Bulls were clearly huffing aerosol paint cans at the time because they rallied on the false notion these statements were somehow dovish. The best I can figure out is that because Powell was not pounding the podium and foaming at the mouth that he was somehow dovish.
Clearly not true.
Since then more investors have gotten the memo that the early year rally was premature. Especially after Thursday when the Producer Price Index showed that inflation is much higher than expected.
I saw that event as Strike 3 for bulls as it came on the heels of 2 other events showing inflation being much higher than expected.
Strike 1 was on Friday February 3rd when the monthly jobs report was far too robust. Not just 517K jobs added when only 190K was expected. But even more insipient was the strength of wage increases...which is exactly the kind of sticky inflation Powell warned about just two days prior.
Connected to this event was the subsequent interview of Powell at The Economic Forum in DC. There he was asked what this robust jobs report meant for Fed policies. He could not have been clearer that it makes him even more hawkish.
Specifically, that it likely will compel the Fed to do 2 possible things. First, to push rates higher than the previous expected 5% level. Second, keep those high rates in place longer than the end of the year that was previously stated. And maybe both!
This caused a very momentary sell off in stocks. But bulls took another hit from their aerosol cans in hopes that the 2/14 CPI report would be a Valentines gift to bulls. Unfortunately, it was actually a deadly arrow through the heart with yet more proof that inflation is too hot.
This set the stage for last Thursday’s PPI report. As already shared, that was a devastating Strike 3 for bulls.
We heard that message loud and clear by adding two more inverse ETFs to our portfolio. That was a prudent move as the S&P 500 has slipped -2.9% since the Thursday open. Gladly our 2 inverse ETFs are doing even better at +3.3% and +4.9%.
The curiosity at this point is whether the overall market is truly ready to get back into bear territory. Or are we just exploring the bottom end of the current S&P 500 (SPY) trading range between 4,000 and 4,200???
If bears really are back in charge now, then we would first see an extension of the recent sell off become a break under the 200 day moving average at 3,942. That would sound a FOMO style alarm for many other investors to reverse their misguided bullish notions to now sell, Sell, SELL.
Other notable spots on the way down would be:
3,855 that is 20% down from the all time highs further re-affirming the bear market outlook.
3,491 the October Lows
3,180 represents a 34% decline from the all time highs which represents the average drop for the market during a bear market.
Let’s not get too far ahead of ourselves.
The point being that bulls have taken a few on the chin. They are not down and out...but they are looking quite wobbly.
At this stage we continue to monitor each new economic event to see what it tells us about the health of the economy as well as inflation and future Fed action.
The more these tilt bearish...the sooner we will hit some of those lower targets noted above...and the more money we will make on the way down given the construction of our portfolio for resumption of the bear market.
What To Do Next?
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- Why 2023 is a “Jekyll & Hyde” year for stocks
- How the Bear Market Should Come Back with a Vengeance
- 9 Trades to Profit Now
- 2 Trades with 100%+ Upside Potential as New Bull Emerges
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Wishing you a world of investment success!
SPY shares rose $0.25 (+0.06%) in after-hours trading Tuesday. Year-to-date, SPY has gained 4.36%, 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.
Are Bearish Investors Coming Out of Hibernation? StockNews.com
