Fade the Friday Rally

Bull markets don’t go straight up. Plenty of bad days, weeks and even months for the S&P 500 (SPY) have been added to the mix. Conversely, bear markets do not go straight down. In fact, they have some pretty sizable rallies that come along the way and often cloud the picture of what comes next. This is why we call them “suckers rallies” because investors get sucked into it…just before being spit out again on the next leg below. This is all to say that we are still in a bear market with lower lows on the way. Here’s why.

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The 24/7 investment media like CNBC needs to keep things interesting to let you watch everything in the name of selling more ads. Their favorite trick is to show the great importance of that day’s news and how it affected the S&P 500 (SPY).

That means they told on Thursday why things are so terrible and why stocks are falling. And then they put on a big smile on Friday as they told how the Fed’s whispers about potentially less stringent rate hikes sparked a monster rally.

Definitely interesting…just not profitable advice.

Let’s talk about what’s really happening…and why…and why stocks are still in a long-term battle market battle with lower lows on the way.

Market Commentary

Shares floated for the past week until another shot was fired by the Fed to dampen the mood. I’m talking about Thursday afternoon’s comments from Philadelphia Fed President Patrick Harker. Here is the key fragment from the CNBC article on the topic:

“Philadelphia Federal Reserve president Patrick Harker said on Thursday that higher interest rates have done little to contain inflation, so more hikes will be needed.

“We will continue to raise interest rates for a while,” the central bank official said in a speech before a New Jersey address. “Given our disappointing lack of progress in reducing inflation, I expect we will be well above 4% by the end of the year.”

The last comment related to the fed funds rate, which is currently targeting a range between 3% and 3.75%.

“Next year we will stop raising the rates. At that point, I think we need to maintain a restrictive pace for a while to let monetary policy do its job,” he said. “It will take time for the higher cost of capital to permeate the economy. We can then, if necessary, fine-tune the data based on the data.”

Pretty much from then on, stocks bounced back from early gains to finish solidly lower. The reason should be obvious. That we may not see the full degree of pain in the economy right now because the Fed’s work is far from over.

So if their efforts so far have not led to a moderation in inflation, it will take much higher rates and probably much more damage to the economy to get the job done. And those hoping for a soft landing must let go of that flawed assumption.

I say that even on Friday there was a jump for the “supposedThat’s why some investors overheard a call at the Fed that would indicate fewer rate hikes and less pain for the economy. Here’s a CNBC article on that topic:

Shares rise Friday as traders hope Fed rate hikes will slow, Dow up 500 points

Sorry folks. I don’t value it that much.

Remember that the Fed will always have internal discussions about the pros and cons of a policy decision. The consensus result is what you see to the public, followed by a tour of Fed officials to add weight and color to those comments.

Let there be NO DOUBT that they are currently on track with what Powell shared at Jackson Hole. That’s a long battle with inflation. DO NOT expect interest rate cuts until the end of 2023. And do expect it to cause economic pain (growth slowdown and weakening of the labor market).

Let’s take a look at this sombre comment about the growing legion of business leaders sounding the alarm about an impending recession. Jeff Bezos from Amazon is the first to be mentioned in this articlebut if you scroll down the article, you’ll find plenty more pounding the table, followed by Elon Musk reiterating that sentiment on Friday.

Most interestingly, this list includes many Wall Street executives. The big curiosity is that the crowd rarely says recession or bear market. That’s because when they do, more customers move from equity investments to cash where they incur little to no expense.

Instead, these people usually speak in riddles of volatility or potential problems on the horizon. So historically you would have to read the lines to get to their real meaning.

The point is, if the Wall Street executives are honestly telling you that a recession is on the way… then it’s best to believe it’s true and invest accordingly. (What we are…more on that below).

Economically, the weakness found in Monday’s Empire State Manufacturing report was confirmed on Thursday as an even worse showing for the Philly Fed Manufacturing Index. The road ahead doesn’t look much better as the New Orders component remains weak at -15.9.

Remember that production is often a leading indicator of the economy as a whole. So the weakness here will likely extend to the services. Some of that was already featured in the Retail Sales report last week, which shows that total spending is ONLY higher because of inflation. If you take inflation out of the equation, you see that net spending is lower. This is probably a big part of why Jeff Bezos is sounding the recession alarm.

Bull markets are long-term trends that typically last 5-6 years. Once on track… it’s hard to get off its ashes.

Bear markets are more of a 12-18 month business. Not that long, but also hard to knock off its lane once the ball is rolling. And indeed it is rolling. And will continue until the Fed puts on the brakes hard enough to slow the economy down and end inflation.

Please remember the battle cry of “Don’t fight the Fed!”

In the Fed’s own words, this is a protracted battle with no signs of lower rates through 2024. This is why so many business leaders are preparing for a recession. And this is why so many investment experts, including yours truly, are beating the bearish drum.

So yes, there will be bear market rallies here and there. Some were quite impressive, as we saw with the 18% gain from mid-June to mid-August when investors came back to their senses. However, the long-term picture points to lower lows and it is wise to align your portfolio with that reality.

What to do?

Discover my special portfolio of 9 easy trades to help you generate profits as the market descends further into bear market territory.

This plan has worked wonders since it kicked off in mid-August, delivering solid gains to investors as the S&P 500 (SPY) plummeted.

If you have successfully navigated the investment waters in 2022, don’t hesitate to ignore it.

However, if the bearish argument shared above makes you curious about what happens next… consider my updated “Bear Market Game Planwhich details the 9 unique positions in my timely and profitable portfolio.

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I wish you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Right”)
CEO, Stock News Network and Editor, Reitmeister Total return

SPY shares traded Friday afternoon at $374.66 per share, up $9.25 (+2.53%). Year-to-date, the SPY is down -20.20%, 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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