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 matters at this moment...inflation, states Steve Reitmeister of Reitmeister Total Return.

Everything else is small talk at a dinner party. This is the "elephant in the room" conversation that really gives us true insight as to the lengths and depths of this bear market and thus how we should invest at this time. Do you know how you eat an elephant? One bite at a time. So, let's get chewing with this week's fresh commentary below...

Market Commentary

We need to stop beating around the bush. The central issue for investors to contemplate at this time is inflation:

  • How entrenched is it?
  • How hard will the Fed have to fight to bring it back down to 2%?
  • How much damage will be done to the economy in that process?
  • How will that affect stock prices?

Yes, the last two bullets as the key elements. Plain and simple, the more damage to the economy...the more damage to stock prices. Conversely, if inflation is easily contained, then will have a shallow bottom to this bear and more quickly resurrect into the next long-term bull market.

But let’s be honest...Most of us are not economists and do not have the right background to accurately predict this crucial outcome. Even worse, economics is an inexact science with experts offering many different interpretations of what happens next. In these matters, I greatly enjoy the work of John Mauldin. Not only does he do a stellar job of explaining these complex topics in simpler terms, but he also usually takes a fairly centrist view. Meaning he believes the outcome is usually not as bad as some people paint...nor as rosy. More in the middle.

Given the priority of the inflation topic, I highly recommend you read Mauldin’s new article below.

Spoiler Alert: Mauldin’s article will increase your bearishness.

Not in a scary “end of the world” type way. Just an honest discussion that we all got drunk on cheap money thanks to low rates. Now we are getting hit with the hangover.

The next salvo in the inflation-fighting war will come from the Fed on Wednesday with their rate decision. Let me repeat what I said about this in my POWR Value commentary on Friday:

“There is not much else to report between now and Wednesday as investors await the Fed rate decision. Will it be 50 or 75 points? who freakin' cares!! The myopic short-sightedness of most investment news is criminally insane. Thus, please pay no heed to price action that day. The only thing the Fed could say to get the bulls back firmly in charge is that rate hikes are over and the war over inflation has been won. But that is not going to happen. Not even close. That’s because the Fed already told us just a couple of weeks back from Jackson Hole that is not in the cards. And that 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 a 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 (I had a similar section in Friday’s POWR Value commentary. This is the version that best suits our purposes for Reitmeister Total Return’s hedged portfolio strategy that is meant to rise in value as stock sink lower).

3,855 = 20% down from the all-time highs. Meaning the point that separates bull from bear territory. That has been a point of support the last few days, but I have little doubt it will be broken soon enough as we dangle at the edge of the cliff with tonight’s close of 3,855.93.

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 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 a 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 the return of the next bull. Maybe even back to fully invested.

I am laying this all out for two 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 make it to 3,000 then probably 100% long as the bounce from the 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 at 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's 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 the 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.

Let’s go!

Closing Comments

It would not surprise me if we fight over 3,855 a bit longer.

And it would not surprise me to see a quick bounce to 4,000.

And it would also not surprise me if we test the previous lows of 3,636 by the time of next week’s commentary.

The point is that we have to be prepared for just about anything. But when the smoke clears from all the day-to-day nonsense...most arrows still point down. Gladly we have a strategy that is well prepared to benefit from that longer-term trajectory.

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