(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
Bull markets are like driving with the sun out and the top down. Everyone enjoys it!
Bear markets are more like driving at night. People make far too much fuss about it…but all you gotta do is turn on your lights.
Indeed the lights are turned on for Reitmeister Total Return members. We may not have been the first ones to sound the bear alarm, but got in the swing soon enough to make a tidy profit this past week as the market finally dove into bear market territory.
Why is the bear market here to stay for a while? How much lower will we go? And what is the trading plan?
The answer to all those pressing questions and more will be answered in our weekly commentary that follows…
Market Commentary
On 5/24 I finally had to face the facts that descending into a bear market was becoming more likely than returning to bullish times. That led to the first leg of creating a hedged portfolio. We built the rest of that hedged wall on 6/3 after calling the bluff of the rally that took stocks back up closer to 4,200.
Since then the S&P 500 has tumbled more than 10% and yet our portfolio generated a +3.17% gain. That very much befits the mission of our service to consistently find outperformance no matter market conditions.
On Monday, with stocks finally making the long awaiting break into bear market territory, (under 3,855) we put out a trade alert to sell ALL our stock positions. Thus, making us no longer hedged. Instead we are now 56.5% short the market with an array of 3 inverse leveraged ETFs. Plus another 15% allocation to a pair of ETFs that rise in value as rates climb. That has been the best trade in town in 2022.
So why will the bear market continue further south making this net portfolio allocation the right choice?
First, because the clear and loud bear signal just went off as we finally closed in bear market territory. Anyone contemplating if this was just a correction or a true bear market just got their answer with a FOMO rally to the downside quite likely.
Some will foolishly wait for the Fed rate decision tomorrow to make their call. The debate is about 50 points vs. 75 points. However, that is completely missing the point that inflation was NOT transitory and the Fed is easily 6-12 months behind the curve. Thus, the odds of them managing a soft landing are very low. (Correction: very, Very, VERY LOW!!!)
How Low Do Stocks Go?
Certainly this is the next logical question. In fact, I got some emails from some customers asking why I think that losses for this bear market will be worse than the -34% average decline. That is especially true with the economy not currently showing a recession.
First, lets remember that investors look out 4-6 months in advance to make moves in anticipation of what the future likely holds. So yes, they often predict recessions before they appear on the scene. In this case, the sell off started in January and as it happens to be Q1 GDP was actually -1.5%. Meaning we are already one foot in the recessionary grave and investors were not wrong for what seemed like an early dose of caution.
Yes, I could get real wonky with explanations of the unusual stuff in that GDP report and how it really wasn’t that bad. Unfortunately it is nearly irrelevant because as we turn our focus to Q2 its not that much better.
Currently the GDP Now estimate stands at only +0.9% down quite a bit from the more attractive +2.5% estimate a month ago. This drop occurred because the most recent economic data has been much softer and if that continues through June data we are probably staring down the barrel of another contractionary period.
Note GDP Now estimates for Q1 stood at +1% the same day the original -1.4% GDP read came out that was later revised to -1.5%. The obvious point is that there should be no comfort in the current +0.9% read.
Putting it altogether investors act in advance of the worst of the economic data. And with stocks already tumbling into bear market territory it will shock the largest investors…many of which are corporate executives who will now take that dose of caution into their business decision making.
Caution = Less Risk Taking = Less Spending = Increase Odds of Recession = Gives Investors More Reason to Sell Stocks (rinse and repeat)
One more nail in the recessionary coffin is today’s NFIB Small Business Optimism report which showed the lowest reading on expected business conditions 6 months from now. Here is the quote from NFIB Chief Economist Bill Dunkelberg:
"Small-business owners remain very pessimistic about the second half of the year as supply-chain disruptions, inflation and the labor shortage are not easing."
All of this increased likelihood of recession will also come in the form of lower company earnings in the quarters ahead. When that comes to fruition then the valuation of stocks (like PE) actually inflates which leads to another round of selling to get valuations down to size. The sum total of these things is why I suspect that we will go past the average 34% decline this bear market (3,180). Perhaps we end down by 40% (2,891).
And just at that darkest hour of maximum pain bottom will be found. Often a 10-20% rally unfolds so quickly that it catches folks by surprise. But indeed it is the very essence of “be greedy when others are fearful”.
The point is that right now more people are getting the memo that this is a bear market and they should join the selling if they have not already. That begets a FOMO rally to the down side (Fear Of Missing Out).
Then there will be a series of bear market bounces followed by hitting lower lows. And then the forming of a bottom will take place.
The right strategy now is shorting the market which we are doing with 3 ETFs that lead to a 56.5% short of the market. Add to that our 2 well reasoned trades to benefit from rising rates as the Fed is most certainly on our side (more proof of that to come at tomorrows FOMC rate decision.)
The sum total of that wisdom has us making attractive profits this week as the market tumbled 10% just past the edge of bear market territory. As we explore lower lows, we will make more and more money with this strategy.
At some point we will harvest those profits and plant seeds for the next bull by buying the best growth stocks at seriously low prices.
Timing bottom is as much art as science. However, 6-12 months later you have made so much money that the headaches in timing have easily faded away.
The point is that this is a bear market and we need to use bear market strategies. To do anything other than that is downright insanity. Gladly we have the right strategies at play in Reitmeister Total Return and ready for whatever comes next.
What To Do Next?
Right now there are 5 positions in my hand picked portfolio that will not only protect you from a forthcoming bear market, but also lead to ample gains as stocks head lower.
This strategy perfectly fits the mission of my Reitmeister Total Return service. That being to provide positive returns…even in the face of a roaring bear market.
Yes, its easy to make money when the bull market is in full swing. Anyone can do that.
Unfortunately most investors do not know how to generate gains as the market heads lower. So let me show you the way with 5 trades perfectly suited for today’s bear market conditions.
And then down the road we will take our profits on these positions and start bottom fishing for the best stocks to rally as the bull market makes it rightful return.
Come discover what my 40 years of investing experience can do you for you.
Plus get immediate access to my full portfolio of 5 timely trades that are primed to excel in this difficult market environment.
Wishing you a world of investment success!
SPY shares were trading at $373.87 per share on Tuesday afternoon, down $1.13 (-0.30%). Year-to-date, SPY has declined -21.04%, 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.
How Low Will Stocks Go? StockNews.com
