There is a long-standing theory that the stock market (SPY) is like a helium balloon. Find out what that means for what stocks are doing now and in the coming months. Read on below for the full story….
By far the most popular article I’ve written in years was last week because it crystallized what so many of us are feeling. Here’s the weather:
Unfortunately, everything that was said then is just as true now. That being that the only trend is NOT a trend. And that is also true after a few solid days in the plus column.
We would like to add a few important updates to help us map out our trading plan for the next few days. That’s what’s in store in this week’s commentary below…
Let’s start with a helpful analogy that will frame our discussion today. And that’s to realize that the stock market is pretty much like a helium balloon.
This means that it’s natural state is to float higher unless held down by a stronger, negative force pushing it lower.
Read that again so it sinks in.
Now, if we step back to the big picture, we can easily see that the condition of floating higher is true, as 85-90% of investment history is framed by bullish conditions where rising is more likely than falling. However, we find that this picture is also true during bear markets when negative events are removed.
Remember the beginning of the year… how the market climbed day after day in January. Maybe it was because there really was nothing negative to keep stocks down.
Next comes February with an increase in aggressive rhetoric from the Fed, which begins to reign in some of the early enthusiasm. Next come concerns about a possible banking crisis and stocks are pushed lower and lower with each wave of negative headlines.
This had stocks returning all of 2023 gains in mid-March with a low of 3,855 shares. Amazingly, we got a +6.6% rally from there for the S&P 500 (SPY) to where we are now.
Was it because of something positive?
No… just the lack of more downsides to keep the stock down. That was all it took to make them float higher again.
Now let’s start looking ahead. Because if we can clearly see if there are any more negatives or positives ahead…then we can understand where the balloon (stock market) is going next.
I spent some time researching economic forecasts from various sources. Yet 60% of them advocate a recession in 2023 leading to a deeper bear market.
Most of the remaining 40% don’t really advocate for a gangbuster-growing economy. They see it more in the stagnant growth category.
Stagnant is not exactly bullish my friends. Nor is it bearish. It would most likely amount to a continuation of the activity we’ve seen so far in 2023. That range is tied to worrying volatility.
I wanted to share 2 of the forecasts that I found most interesting, starting with the Conference Board, which offers a fairly typical recession call. They see the bad times starting in Q2 of this year with -0.9% GDP deteriorating in Q3 to -1.8% followed by -0.6% in Q4 before things improve next year (Check out their full prediction here).
Yes, they see inflation falling, which is what the Fed hoped to achieve. Unfortunately, employment is also bursting and will not improve until mid-2024.
How accurate do I think this is?
Close enough because economic forecasts are very difficult to enter perfectly. The thing is, this is probably a fairly mild recession that should still be hard enough to send stocks up 15-20% lower from here. And yes, the more painful the future recession…the more shares would fall.
Now I want to turn our attention to some of the extreme views out there, such as the famous Jeremy Grantham speaking of the bursting of a “everything bubblesthat could lead to a 50% peak-to-trough decline for the S&P 500 (SPY).Read that here).
However, let’s not forget that Jeremy Grantham is a permanent bear. And like a standing guard, he’s only right twice a day…and amazingly wrong the rest of the time. So as interesting as it may be to read such prospects, please take them with a grain of salt.
In the near term, I expect stocks to remain in the same trading range we’ve seen all year, with a low of 3,855 and a high of 4,200. Nearly every movement in that range has turned out to be a meaningless noise that is not predictive of what comes next.
We will break through when more people are convinced that recession fears are overblown. And we will break down if the recession does indeed come to town.
This is all to say that a focus on the fundamentals is still key. Like next week, pay attention to the list of key economic reports, such as:
4/3 ISM production
4/5 ISM services
4/7 Government employment (with a focus on wage inflation)
And after that, the focus will be on the first quarter earnings season.
Will enough clues emerge in April to make us break somehow?
Probably not UNLESS another wave of bank failures emerges. That could create a Jenga moment where stocks tumble as risk-taking would go out the window.
At this point, I still believe the probability of a recession and a deeper bear market is around 70%. This explains why I continue to manage my newsletter portfolios for that larger bearish opportunity.
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 7.46% 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.