You could tell the market was oversold back as we were making fresh lows in mid October. So no surprise a bounce was soon to follow.
That rally has been distorted and overextended by investors not understanding basic economics. That being inflation coming down from 8% to 7.7% is not even close to the Fed target of 2%. Thus, their work to rein in inflation, and likely harm the economy, is far from over.
Now stocks are consolidating under resistance at 4,000 for the S&P 500 (SPY) awaiting the next catalyst. What will it be and what happens next?
That will be the focus of this week’s Reitmeister Total Return commentary.
Market Commentary
Last week I noted that the bullish bias of holiday weeks was an optical illusion. So don’t fall for the seeming bullish signal of crossing above 4,000.
Indeed it didn’t take long for the turkey hangover to kick in as stocks got busy to the downside on Monday with a -1.54% session closing at 3,963.94. And then went a few ticks lower on Tuesday.
The long term outlook is decidedly bearish for a multitude of reasons stated in my recent commentaries. In fact, the vast majority of investors now see the formation of a recession coming in the first half of 2023 which should lead to further stock downside.
The interesting question is what will it take to kick that next downward leg into motion?
Since it was a false understanding of October inflation reports that sparked the recent rally...then likely it is the removal of that catalyst to get stocks retesting the October low of 3,491 in earnest.
That catalyst could occur as early as Wednesday or Thursday of this week with the release of PCE Core Prices and PCE Core Index respectively. These are considered the Feds favorite measures of inflation and could have market moving impact.
Or perhaps it could be further evidence of economic decay being displayed in the following roll call of economic reports:
12/1 ISM Manufacturing
12/2 Government Employment Situation
12/5 ISM Services
After that will be a brief pause until we consider this next slate of news:
12/9 Producer Price Index (PPI)
12/12 Consumer Price Index (CPI)
12/13 Fed Interest Rate Decision
For as strongly as I believe in the extension of the bear market into 2023, I have to admit that anything is possible. Especially true with energy prices coming down of late. That can often have far reaching dis-inflationary benefits increasing the odds of a soft landing.
Don’t get me wrong...most signs point bearish. And nothing about the recent rally is out of the ordinary for long term bear market cycles. However, when most investors gang up on one side of the market see-saw it can often lead to surprising action in the other direction.
It is from that counterintuitive notion that comes one of the most oft used investment sayings:
“The market climbs a wall of worry and slides down the slope of hope”.
Meaning that the stock market often does the opposite of what you expect. So it is a call to keep watching each new clue as it comes out and to stay nimble in your trading plan to account for these fresh inputs.
Long story short, the smart money still rides on recession and deeper bear market in early 2023. The 8 key economic events coming between now and mid December noted above will likely hold the clues for what happens next.
As always I will keep vigilant watch for these events and make any necessary changes in our portfolio. Until then most evidence currently in hands still points to recession in 2023 with bear market bottom closer to 3,000.
What To Do Next?
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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!
SPY shares . Year-to-date, SPY has declined -15.82%, 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.
When Will the Bear Market Roar Again? StockNews.com
