The S&P 500 (SPX) is a virtually frozen week over week. But don't let that calm exterior fool ya'. There has been a serious spike in volatility since the Fed meeting, states Steve Reitmeister of Reitmeister Total Return.

What does it mean? In a word...nothing! If you are interested in a deeper explanation, with a trading plan for what comes next, then keep on reading this week's edition of Reitmeister Total Return commentary.

First up...if you are not a member of POWR Screens Ten, then you need to join me tomorrow for this timely webinar that shares details on our most powerful stock-picking service. In last week’s commentary, I was preparing folks for the Fed’s Wednesday announcement. Here were the key points that proved to be quite true. Let’s start with the Fed’s game plan as clearly spelled out in Chairman Powell’s Jackson Hole speech in August:

  • This is a long-term battle to get inflation back to the 2% target.
  • Do not expect lower Fed rates through 2023.
  • Expect “economic pain” which was further described as below-trend growth and a weakening of employment.

Now let’s remember that this speech quickly sobered up investors who were enjoying an 18% summer rally up to 4,300. A month later we were making new lows below 3,600. The Fed cherishes clarity and consistency in its communication. And thus, I say that any investor who thinks there will be a meaningful change in policy announced Wednesday, only a couple of months after the Jackson Hole speech, is smoking something that is still quite illegal. Now we get down to the tricky part. That being to determine which is the more likely scenario going forward.

Scenario One: Inflation moderates sooner than expected leading to less total Fed intervention and the creation of a soft landing for the economy. In this case, it is not unreasonable to say that we have reached a market bottom and a new bull market emerging.

Scenario 2: We have already opened up Pandora's box with the economy. Once the wheels are in motion to move toward recession, then the economy can go through a vicious cycle that grinds lower and lower. In this case, the bear market is still in play with likely bottom closer to 3,000. Which scenario is right? I believe Scenario Two is much more likely and why I remain bearish. However, Scenario One is a possible outcome that needs to be monitored closely.”

Now let’s remember the key point made by Chairman Powell on Wednesday. That being the window to create a soft landing has narrowed. That statement was the nail in the coffin for stocks as the S&P 500 (SPY) went screaming lower by -2.50% on the session. Therefore Scenario One of a soft landing is even less likely than I stated last week and therefore the bearish Scenario Two is that much more likely. None of the news since then has been positive for stocks including:

  • A slew of large layoffs from leading tech companies.
  • PMI Composite Index for October ends at 48.2 down from 49.5. Even worse is the Services component at 47.8. (Under 50 = contraction).
  • NFIB Small Business Optimism Index drops to a three-month low of 91.3 (below 100 is bad news). Here is the key line from NFIB Chief Economist, Bill Dunkelberg: "Owners continue to show a dismal view about future sales growth and business conditions, but are still looking to hire new workers.”
  • Commodity prices, especially energy, have spiked once again not helping the inflation picture. Reity, if all of this is true...then why are stocks not falling farther, faster? Because that is not how the market works. Even during the most raging bull market, there are countless pullbacks and corrections before stocks make their next leap forward. That is no different with a bear market. Just everything is 180 degrees in the opposite direction. Meaning that during bear markets we have tremendous drops followed by rip-roaring rallies followed by the next drop to new lows. The sooner you are comfortable with this pattern, the easier it will be to ride out the highs and lows.

So at this stage, the price movements are just noise and nonsense. Quite likely investors are awaiting the next obvious catalyst. I suspect that will come on the employment front has been a bit too robust for investors to fully fret about a looming recession. Simply these newly announced layoffs are just the tip of the iceberg that starts the souring of the employment picture. Once that negative trend gets a foothold, investors know it will only get worse. That is when we likely start the next leg lower for stock prices. First retesting the recent lows of just under 3,600. And after that quite a bit lower.

Remember 34% is the average bear market decline. That equates to 3,180 and probably explains why UBS recently talked about a market bottom of around 3,200. What will be the lowest price we reach? And when? Unknown and unknowable at this time. Yet, I am confident predicting much lower than we are now...and probably another three to six months until that final capitulation before the next bull market begins. As such, keep your bearish bias in place with trading strategies to generate profits as stocks head lower.

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