Holiday sessions like this week naturally carry a bullish bias for stocks (SPY). That’s because the joy of Thanksgiving typically leaks through to higher stock prices. The risk gives this upward movement some meaning when the long-term trajectory is still clearly bearish. Let’s take a roll call from the recent events that continue to point the compass towards more downward action ahead, along with our game plan for profit as stocks hit new lows in the coming weeks.
Yes, shares closed above notable resistance at 4,000 for the S&P 500 (SPY) on Tuesday. But with even more holiday sessions to go this week… prices are likely to continue creeping higher for a while.
The key at this stage, when it comes to price action, is whether stocks really have what it takes to clear the hurdle of the 200-day moving average (now at 4,062).
Remember, this moving average (red on the S&P 500 chart below) is considered the long-term trendline that really helps to delineate bullish from bearish times.
As you can see, the market turned bearish quickly this year with many failed attempts to resurface. This time it will be no different.
The storm clouds are forming for a recession that will begin in the first half of 2023 as the Fed raises rates to quell the flames of inflation.
Remember, the Fed has already told investors that their long-term approach will come with some degree of economic pain. While they ‘hope’ to avoid a recession, they reluctantly admit that it is unlikely.
That message was delivered loud and clear by Chairman Powell at his 2/11 press conference following the most recent 75 basis point increase. He was asked if the “window to create a soft landing for the economy had narrowed”.
The look on his face was even more powerful than the words in which he admitted that with inflation barely moving at this point, it would take a lot more Fed ammunition to win the inflation battle. And so very unlikely to create a soft landing indeed.
If there is no soft landing, it means a hard landing (recession).
Remember the famous words: Don’t fight the Fed!
So if they tell you they are far from done with their battle against inflation. And that the chance of a soft landing becomes almost zero. Then it’s probably best to believe them and prepare for a recession that will bring lower share prices.
Economists polled by the Wall Street Journal see the probability of a recession in the coming year as up to 63% as of the mid-October reading. This view falsely offers some hope with a 37% chance that it will not happen.
And now I’m pulling out the carpet in informing you that economists have a terrible record. That’s because the average recession hit the scene when the average probability was only 40%. In that light, you can understand how daunting that 63% chance of a recession is for our outlook going forward.
Wall Street analysts are also beating the drums of the recession, as the most recent weak earnings season has led to a significant drop in estimates for the future. The fourth quarter is approaching zero earnings growth. While the first 2 quarters of 2023 are decidedly negative.
What’s worse is that earnings experts, such as EarningsScout.com’s Nick Raich, expect the upcoming earnings outlook to be cut even further. That’s because Wall Street is always too optimistic at the start of a recession.
The roll call of ominous indicators continues with the Chicago Fed National Activity Index falling into negative territory again this week. This is a fairly broad reading of the economy which is at its lowest level in 4 months. The change in trend back to negative usually points to even lower readings ahead.
Next we have the chart of 3 different regional Fed reports all pointing in the wrong direction. That starts with the value of the Richmond Fed on Tuesday going from a plus of 5 for output to -9. Services also fell to negative at -3.
Thursday was no better with the Philly Fed Manufacturing index falling to -19.4. New Orders also pointed south at -16.2, pointing to more bad times ahead.
Finally, if we search across the country for the Kansas City Fed, we see the composite index (manufacturing and services) at -10.
All this begs the question; Why have stock prices been rising for about 6 weeks when the outlook is so clearly negative?
Because a bear market is a long process with lower lows and lower highs on the bounces. Not just a smooth elevator down. That point is made loud and clear with the S&P 500 price chart I shared above.
And also comes out loud and clear for previous bear markets like 2008-2009 below:
And for the previous bear market from 2000 to 2003:
This recent rally is likely to peak quickly if foolish bulls are thwarted near the 200-day moving average.
Wise investors will appreciate the lessons of history and that you shouldn’t bullishly run into recession. That’s when it pays to bet on more market declines.
Once in recession, with stocks being pushed lower, it’s wise to bet on the bottom as the next bull market should be right around the corner. Not in advance.
So please enjoy the holidays. Don’t be fooled by the optical illusion of this holiday rally.
What to do now?
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And now is a good time to reload as we face another bear market rally before stocks hit even lower lows in the weeks and months to come.
If you successfully sailed through the investment waters in 2022, you can ignore it.
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Wishing 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 rose $0.02 (+0.01%) in after-hours trading on Tuesday. Year-to-date, SPY is down -14.83% versus a percentage increase in the benchmark S&P 500 index over 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 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.
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