It’s been a while since I’ve spoken to someone who enjoys the recent stock market action. Too fleeting. Too illogical. No real trend. All true. However, the more we understand why this is happening, the easier it is to diagnose what will happen from here and how to work our way to profit. (Spoiler Alert) I’m still bearish. Fortunately, I still see 7 timely trades that I can use to make money as the S&P 500 (SPY) goes down from here. Read on below for the full story….
I woke up 2 days ago and already knew the theme for this article:
The WORST fair ever!
That’s because this ride is more Tilt-A-Whirl than Merry-Go-Round thanks to all the volatility. Soon the corn cobs, cotton candy and elephant ears arrive. (sorry for the images… but needed to get the point across 😉
When we retreat to the big picture, we can all understand to chart our way to calmer shores. That’s in today’s commentary.
Okay… I may be joking that this is the worst stock market ever… but it sure isn’t fun. That’s because most people are rational and want things to happen in a more orderly way. This fair of late has been anything but that.
Up, down and everywhere. Not just over weeks and months… but WITHIN a single session. This candlestick chart from the past month tells that story in spades:
So much to point out on this chart, starting with the fact that we are absolutely flat month after month. This seems to indicate that nothing significant happened.
Look deeper now. Note how short all the rallies are… as well as the quick duration of the sale. And finally notice how big some of those candles are with huge intraday moves.
All that action over the past month… and none of it is reflected in the market average.
That’s where it makes sense to look at things at the industry level now, where we see a lot more diversity between winners and losers.
The obvious part is the weakness of the financial sector due to all the bad news in the banking sector. Real estate is so closely tied to the banks that it’s pretty obvious why that group has taken it on the chin as well. The rest of the weaklings are a fairly high-risk group that talks to growing fears about future economic health.
The counterpart to that is to discover that most of the Risk Off groups are near the top of the list: Consumer Defensive, Utilities, and Healthcare. The peculiarity is the power of communication services and technology. However, when you consider that Tech is dominated by FAANG… and they often act as a defensive group that people tend to cling to… tie.
Everything discussed so far explains WHAT is happening… now let’s move on to WHY.
The simple answer is to say that the outlook for the economy (and therefore the stock market) is unclear. Thus, each new day brings new headlines that are bearish today and bullish tomorrow.
Sure, people see the threats that could lead to a recession… but it just doesn’t happen. And that’s what confuses the chances of what happens next and that prolongs this tug-of-war between the bulls and the bears.
For example, many economic data weakened in late 2022. Such as ISM Manufacturing below 50. And retail sales are shrinking even after inflation is removed. This led to a sharp reduction in corporate earnings expectations for the first quarter of this year, with Wall Street currently forecasting a profit loss of -9%.
That precipitous loss doesn’t look too good when you realize that many thought Q1 GDP would also be negative…perhaps the start of another recession. And yet, if we now look at the most respected GDP forecast model (GDP Now of the Atlanta Fed) which is +3.2% for the current quarter.
Reity, you’re starting to contradict yourself. I thought you were bearish in the market?
Yes. That’s true. I just wanted to clarify WHY the market was so volatile. Those are the mixed signals about the economy that have bulls and bears vying for control.
Now we must turn our attention to the future and what is likely to happen. Again, I want to share this simple, yet effective comparison to quickly explain why I still wear the bear’s cloak. (It contains a major new addition in bold)
Higher rates on the road (5%+)
+ In effect at LEAST until the end of 2023
+ 6-12 months delayed economic impact of Fed policy
+ Bank credit crisis
= fertile ground to create a recession in the future
Fed Chairman Powell talked about all the first 4 factors during the recent rate hike announcement and press conference on March 22. In fact, stocks rose during the speech until he hit people with a 1-2 aggressive punch staring with:
“It is possible that this [banking crisis] will turn out to have very modest effects — these events will turn out to have very modest effects on the economy, in which case — and inflation will remain strong, in which case, you know, the path will — may look different. It is also possible that over time this potential tightening will contribute to a significant tightening of credit conditions, and if it does, it basically means that monetary policy has less work to do. We just don’t know.”
This was followed by a statement that the credit crunch IS ongoing and is relatively equivalent to a base cut of 25-50 points on its own. As a result, shares fell from almost +1% session to about break-even. And then came blow number 2.
That was when a reporter stated that current studies show that the average investor expects just one more rate hike of 25 basis points and then LOWERS their rate every meeting after that. So, are investors wrong?
It wasn’t just the words he used. That’s how Powell put it. Like a disappointed parent when their child takes home an F on the report card. (what do you not understand here!!!).
And then he very emphatically reiterated that their forecast still requires NO CUTS this year. From there, the S&P 500 gave up the 1% gain and tumbled all the way to -1.65% in the closing stages.
For me, the aforementioned equation that begins with an aggressive Fed ends with a recession at some point in the future. Obviously it’s not Q1… but Q2 and the rest of the year are still very much in play.
Unfortunately, until investors see more EVIDENCE of a recession unfolding, the recent trading range and extreme volatility will continue. Therefore, I recommend investing based on what you predict will happen outside of that range. Again, that tends to be decidedly bearish in my book.
What to do now?
Watch my brand new presentation, REVISED: Stock market outlook for 2023
There I handle vital matters such as…
- 5 Warning Signs The Bear Is Coming Back Now!
- Banking crisis provides another nail in the coffin
- How low will the stock go?
- 7 Timely trades to make a profit on the way down
- Plan bottom fishing for the next bull market
- 2 Trades with 100%+ upside potential as new bull emerges
- And much more!
If these ideas resonate with you, click below to access this essential presentation now:
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return
SPY Stocks. Year-to-date, SPY has gained 3.88% versus a percentage increase of the benchmark S&P 500 index over the same period.
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investing experience in the Reitmeister Total Return Portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.