Investigate investors in June and no doubt the bears are in charge. Then we go on a 2 month rally with 18% gain for the S&P 500 (SPY) and the bulls appear to be King of the Hill. Now we’ve regressed a bit over the past week. And the way forward is a bit more unclear. That’s why 40-year investment veteran, Steve Reitmeister, is weighing what happens next for the stock market and why he still has a bearish bias. Read on below for more.
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The bulls hit the 200-day moving average on Monday 15/8 and then went blank. Since then, the bears have been in charge of stocks falling about 200 points from last week’s high.
So, who’s in charge… Bull or Bears?
And just as importantly… how does the answer to this question affect our trading strategy?
These essential topics will be the focus of this week’s Reitmeister Total Return commentary.
Market Commentary
Bulls will say the recent sell-off is nothing more than healthy profit taking after an impressive 18% gain from the June bottom. And that this is just a little breather for the next leg up.
Bears will say that the rally of the past was nothing more than a typical bear market rally, also known as a bear trap. And that while investors are getting their heads out of their ass, they are realizing that conditions are still quite bearish.
For example, as if there weren’t enough inflationary pressures, we are now discovering a global drought with water levels on major transport rivers around the world (such as the Yangtze in China and the Rhine in Europe) at terrifyingly low levels.
What’s the problem?
Less rain = bad for agricultural production = less supply = higher food prices
Large waterways with less water = more difficult to navigate = higher transport costs.
This does not help the picture for those who believe that the slightly lower inflation figures in recent months were a sign that we were quickly on track to solve this problem without too much Fed intervention that would likely hurt the economy. In fact, the Bloomberg Commodity Index Total Return rises higher. And now 11% above the July lows, when investors were so excited about the idea that inflation was moderating.
The still apparent inflationary pressures are still a big part of the economic problem that has not yet completely destroyed the economy. But also in terms of price action, here are some stats I found in a recent SeekingAlpha article on Bear Traps (aka Bear Market Rally’s…aka Suckers Rally’s).
“Bear trap? This stock rally reflects bear market movements dating back to the start of the Great Depression, according to BofA Securities. The S&P 500’s average gain in 43 bear market rallies of over 10% dating back to 1929 is 17.2% over 39 trading days, while it is up 17.4% in this case in 41 days, making it a “textbook example”. This time, 30% of the S&P’s profits come from just four stocks — Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and Tesla (TSLA) — noted strategist Michael Hartnett, adding that another risk for bulls, that’s whether the “Fed knows it or not, they’re far from done.”
The evidence of the above is evident in the many webinars I have done to show the chart patterns of past bear markets. Painful drops followed by sharp bounces (rinse and repeat many times until the final capitulation bottom is found).
There is virtually nothing about the recent bottom in June that feels like a capitulation bottom. Meaning where all hope is lost and from that darkest hour a real and lasting bottom has been found.
So who is right about the direction of the market… bulls or bears?
Because bearish as I am, I have to admit that the full evidence for the bears is not available at this time to prove that they are victorious. However, the same goes for the bulls. They need to prove that the Fed can tame inflation without doing too much damage to the economy. This is a grandiloquent act that they have failed more often than they have succeeded.
This leads to the idea that we are stuck in a trading range between the 100-day moving average at the low end of 4,086 and 4,315, which indicates the 200-day moving average. Any movement within range is meaningless noise.
This means that as impressive as the rally is… if it falls within the range, it is still unproven bullish.
And now it doesn’t matter how intense the drop is, like Friday or Monday… if it’s still in range then it doesn’t prove anything to the bears.
The fact is that we can stay in this range for a while so that the investment jury can review all the key evidence. And actually that would be a logical and healthy move. So don’t be surprised if we are in this range for a few weeks or even a few months.
It is for this reason that I continue to advocate for our hedged strategy that is perfectly built for range-bound behavior. In fact, our hedge has generated an impressive gain of +2.12% since it was introduced on Monday 15/8, while the S&P fell -3.92%.
The beauty of this strategy is how easy it is to swing bullish or bearish when final judgment is in hand. If it’s bearish, sell the long stocks and then enjoy the gains unfolding in the inverse ETFs.
And if it is indeed the bulls that dominate, do the opposite by selling the short positions so that the gains of the long stocks can shine through.
As I said, our strategy is good. Now drop the chips where they can.
What to do?
Discover my hedged portfolio of exactly 10 positions to help generate profits if the market falls back into bear market territory.
This is not the first time I have used this strategy. In fact, I did the same at the start of the Coronavirus in March 2020 to generate a return of +5.13% in the same week the market fell nearly -15%.
If you are completely convinced that this is a bull market… just ignore it.
However, if the bearish argument shared above makes you curious about what happens next… consider my “Bear Market Game Planwhich contains details of the 10 positions in my hedged portfolio.
Click here for more information >
I wish 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. Year-to-date, the SPY is down -12.54%, versus a % increase in the benchmark S&P 500 index over the same period.
About the author: Steve Reitmeister
Steve is better known to the StockNews public as “Reity”. Not only is he the CEO of the company, 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 selection.
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