To help predict the answer to that question, I offer up this week's Reitmeister Total Return commentary to plot our course forward, states Steve Reitmeister of Reitmeister Total Return.
In June, stocks tanked.
In July, stocks rallied.
In August, stocks ???
Last week, I wrote a manifesto on why I still think we are in the midst of a bear market and that right now we are just in experiencing a good ol’ fashioned suckers rally. This is why I continue to short the market expecting lower lows ahead.
However, I do have to admit that it is possible this could be the start of the next bull market, and won’t let it slip through our fingers leading to a bullish portfolio contingency plan. The key was relying upon the proven market timing signals from my friends at TheDowTheory.com.
All that and more is spelled out in this extended commentary: Bull or Bear???
Subsequently to that I just hosted the August Platinum Members webinar to spell some of these ideas out further. With more charts showing the commonality of bear market rallies equally as long and equally as impressive as this one before the next leg lower.
All in all, the similarities of this market with the extended bear of 2000-2003 are starting to become more evident, and why we have to be patient for that likely next leg lower.
Since then it does appear that stocks are stalling out at the same peaks from two months ago.
The news media fixated on Nvidia (NVDA) and Micron (MU) giving back-to-back wake-up calls to investors as the reason the rally stopped in its tracks. Like how the big 1% gain on Monday frittered away into a loss by the end of the session.
Note that both of these industry giants gave unsettling outlooks of decreased demand for semiconductors which is basically the heartbeat of technology. This explains the weakness in the technology sector which was recently leading the market higher.
Tim Biggam, the editor of our POWR Options newsletter, also sees good reason for this bear rally to run out of steam. He shared those views in this new article: Four Big Reasons Why the Bear Rally is Nearing an End.
Or take a gander at how there has been a parade of Fed Governor’s clearly singing from the same song sheet that they feel the economy is strong enough for them to aggressively raise rates. The latest such statement came from Fed Governor Bowman in which she says to not be surprised if another serving of a 75 basis point hike is on the way.
Get it straight dear friend. The Fed is a well-orchestrated machine whose first goal is transparency. Their second goal is fighting inflation. And third is achieving maximum employment. Right now they are transparently telling us that there is no end to raising rates in sight to beat down the flames of raging inflation.
To me this says that we may have averted a recession to date...but these hawkish moves by the Fed greatly increase the odds of a recession appearing in the future. Not surprisingly, a recent Goldman Sachs poll shows that the majority of economists and investment strategists predict that if a recession is coming, it will be in Q1 of 2023.
That is why investors are right to pause here and see what comes next. If somehow we raise rates and the jobs market continues to shine...then there will be solid fundamental ground to advance higher and I will happily pick up the bullish banner.
However, if we start seeing cracks in that employment foundation, then it sets off a chain reaction that we have discussed before:
Job Loss > lower income > lower spending > lower profits > lower stock prices.
The point is that we are not currently in a recession. However, we still very much have the elements in place to create one in the future. Just check out the chart below to see how often periods of high inflation precede recessions and bear markets:
Again, I appreciate how tempting this recent rally is to investors desperate to not be on the wrong side of the action. Couple that with just enough media attention and there seems to be reason for this to actually be the start of the next bull market.
But before you commit to that, please refer back to the inflation/recession chart above. Do you see any periods of inflation spiking to current levels that did not have a recession to follow?
As you know the most dangerous thing in investing is saying “this time is different”.
Normally, it is not different. Most often life follow well worn patterns. And for me, the pattern of high inflation and recession/bear market is hard to ignore.
So indeed, this time might be different. But if I was you, I would wait for more proof that recession has definitely been averted before expecting more upside than we have seen already. Until then, I would keep a bearish bias in place.
Direxion Daily S&P 500 High Beta Bear 3X Shares (HIBS) was our favorite position in June. And has been public enemy number one since as the ugliest stocks have been leading the market higher. But check it out today to appreciate why it stays on the books.
+6.68% HIBS vs. – 0.42% S&P 500 which is a nearly 16X inverse move.
If indeed this rally is over, then likely serious profits will be taken off the highest beta stocks...like the ones inside of HIBS and we will see it outperform once again.
And yes, FolioBeyond Rising Rates ETF (RISR) and ProShares Short High Yield -1x Shares (SJB) stay on the books too. The Fed will be raising rates and it will bring up rates across the bond spectrum. If and when the recession bell starts to sound, then junk bond rates will soar and SJB will be one of the best games in town.
In June, this portfolio had more green than the Boston St. Patrick’s Parade. And now it's redder than the eyes of people at a Grateful Dead concert (you know what I mean ;-)
If I am right about this being a longer-than-average bear market like 2000-2003 then we are likely in a topping pattern right now with stocks heading lower for a spell. At first our portfolio will become a Christmas sweater with rows of red and green. But in time, green will dominate.
And yes, we are still open to the possibility that the next bull market has emerged. Lower odds for sure...but possible. And if indeed stocks press higher and TheDowTheory.com buy signals initiated then we will play ball. Just appreciate the odds that are lower than the extended bear market with more legs to the downside and suckers rallies to follow.
Bull markets are easy. They last five plus years and just about every investor will carve out a profit.
Bear markets are the opposite. Much shorter. Much more severe price action. Much easier to lose sight of the horizon and make the wrong moves.
This is why I talk in probabilities and not certainties. But if we appreciate the lessons from history and watch the key indicators we can get the probabilities on our side.
I know it doesn’t feel like that now, but sense that the tide is turning and you will be happier with this patient and deliberate approach in the weeks ahead.