There is too much talk about the day to day movement of the market. I want to take a step back from that and discuss what really matters at this moment — inflation, asserts Steve Reitmeister, editor of Reitmeister Total Return.

Everything else is small talk at a dinner party. We have a long term fight to beat down inflation and it will cause more economic pain. And yes more economic pain means worse that the +0.5% GDP estimate for Q3.

It means likely recession which includes rise in unemployment. That is not being served up at this moment but will likely take top billing in the months ahead. And with it the bear market should press lower. Add it all up and it increases the odds of more downside for the market. So, let’s talk about key price areas on the way down for stocks.

3,855 = 20% down from the all time highs, meaning the point that separates bull from bear territory.

3,636 = the June lows. Rarely will you see any correction or bear market that ends without retesting the lows. So that is likely the next point of support as we explore the true depths of this bear market.

It may be hard for stocks to head below this without seeing some of that pain on display that the Fed talked about. Like the employment market finally showing some weakness.

So if we rush down there and pain is not on the menu yet, then this will be ample support perhaps with another juicy bounce to follow. Not an 18% insanity bounce like we say in July/August. Perhaps more like +5-10% awaiting the next economic signals. If and when the economic pain train is on the way, then stocks will keep heading lower.

3,373 = 30% down from the all time highs. Likely there will be some folks starting to bottom fish around here. I may do that as well. Or simply start to take profits on our inverse ETFs...but definitely not fully long at this time given the points noted below.

3,180 = 34% decline from the highs which is in line with the average decline of a bear market. Another spot to take profits on inverse ETFs and bottom fish for the eventual return of the next bull market.

3,000 = Very interesting psychological level of support. It may be hard to go lower than that unless it truly feels like a much worse than normal recession. And yes, we may never make it down here as there will be a lot of buying activity between 3,180 and 3,373. But if we did get this low, then will put more money to work in the market for return of the next bull. Maybe even back to fully invested.

I am laying this all out for 2 reasons. First, to understand the likely downside potential and why the hedge is in place to mop up gains on the way down. Second, to show where we may want to start taking profits on the hedge and prepare for the next bull market. I will be very tempted to maybe get back to 30-40% long in that area around 3,373.

However, given how much valuations got stretched on the way up in this bull market (thanks to ultra low bond rates making stocks so damn attractive) then indeed they may fall further than average. So if we get down to 3,180 then likely get back to 50-60% long. And if we make it to 3,000 then probably 100% long as the bounce from bottom will be fast and furious.

Remember nobody rings a bell at the top or bottom. It will not be easy. And will be hard to do in the moment because we will be buying when everything looks terrible (economy...price action etc). But indeed, with the stock market it is always “darkest before the dawn”. Or simply it becomes Warren Buffett time to...”be greedy when others are fearful”.

You now understand why the bias has pushed bearish once again. And yes, you also understand from the 18% July/August bear market rally that the road to bottom will not be easy. It requires patience and discipline as there are always ill-fated rallies sprinkled in. It also requires a plan which we have; to not just profit on the way down...but to get ready to ride the next bull market.

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