I have been bearish since May 2022. However, I have to admit that the early 2023 evidence did increase the odds of a potential return to a bull market, states Steve Reitmeister of Reitmeister Total Return.
That party is over! Let's discuss the increasing evidence that bears are ready to come out of hibernation with much more downside to follow. And yes, this will come hand in hand with a trading plan to stay on the right side of action.
For as much pride as I take doing the Reitmeister Total Return, I have to admit that I have personally enjoyed greater investment success during the bear market by using the resources of our coveted POWR Screens ten service. Many RTR members are already happily in the same boat. So, this message is for the rest of you that have not yet discovered this profitable service.
POWR Screens ten is where the computers do the heavy lifting to find the very best stocks...even in the midst of a bear market to produce shockingly good results. Like the 61% gain I have enjoyed in my Roth IRA account since I got started on 2/23/21. And yes, those gains kept rolling in during 2022 even while the market was tumbling lower.
Plain and simple, stocks rallied on a false premise to start 2023. That being some signs of moderating inflation that could lead the Fed to end their rate hiking regime earlier than expected. This soft landing scenario compelled more investors to believe that the bottom was already established and time to bid up stocks for the birth of the next bull market.
The Fed wholeheartedly repudiated this idea at the February 1st meeting. They saw inflation as too sticky with no plans to change their hawkish course with higher rates in place through year-end. Bulls were clearly huffing aerosol paint cans at the time because they rallied on the false notion these statements were somehow dovish. The best I can figure out is that because Powell was not pounding the podium and foaming at the mouth he was somehow dovish.
Clearly not true. Since then more investors have gotten the memo that the early-year rally was premature. Especially after Thursday when the Producer Price Index showed that inflation is much higher than expected. I saw that event as Strike three for bulls as it came on the heels of two other events showing inflation being much higher than expected.
Strike one was on Friday, February third when the monthly jobs report was far too robust. Not just 517K jobs were added when only 190K was expected. But even more insipient was the strength of wage increases...which is exactly the kind of sticky inflation Powell warned about just two days prior. Connected to this event was the subsequent interview of Powell at The Economic Forum in DC. There he was asked what this robust job report meant for Fed policies. He could not have been clearer that it makes him even more hawkish.
Specifically, it likely will compel the Fed to do two possible things. First, push rates higher than the previously expected 5% level. Second, keep those high rates in place longer than the end of the year that was previously stated. And maybe both! This caused a very momentary sell-off in stocks. But bulls took another hit from their aerosol cans in hopes that the 2/14 CPI report would be a Valentines' gift to bulls. Unfortunately, it was actually a deadly arrow through the heart with yet more proof that inflation is too hot.
This set the stage for last Thursday’s PPI report. As already shared, that was a devastating Strike three for the bulls. We heard that message loud and clear by adding two more inverse ETFs to our portfolio. That was a prudent move as the S&P 500 has slipped -2.9% since the Thursday open. Gladly our two inverse ETFs are doing even better at +3.3% and +4.9%.
The curiosity at this point is whether the overall market is truly ready to get back into bear territory. Or are we just exploring the bottom end of the current trading range between 4,000 and 4,200? If bears really are back in charge now, then we would first see an extension of the recent sell-off become a break under the 200-day moving average at 3,942. That would sound like a FOMO-style alarm for many other investors to reverse their misguided bullish notions to now sell, Sell, SELL.
Other notable spots on the way down would be:
3,855 which is 20% down from the all-time highs further reaffirming the bear market outlook.
3,491 the October Lows
3,180 represents a 34% decline from the all-time highs which represents the average drop for the market during a bear market.
Let’s not get too far ahead of ourselves. The point is that bulls have taken a few on the chin. They are not down and out...but they are looking quite wobbly. At this stage, we continue to monitor each new economic event to see what it tells us about the health of the economy as well as inflation and future Fed action. The more these tilt bearish...the sooner we will hit some of those lower targets noted above...and the more money we will make on the way down given the construction of our portfolio for the resumption of the bear market.
Let’s be honest...we had a really crappy start to 2023 where we woefully underperformed the market as the worst stocks raged higher. Gladly we saw through the illogic of that movement and made appropriate adjustments to our portfolio. This has led to the market slipping -4.3% in the past two weeks while our portfolio is a notch better than breakeven. Or simply stated...we have beaten the market by 4.3% in the past couple of weeks...half of that coming today alone.
It is not how you start the race...but how you finish. And we have plenty of time to keep pulling back ahead in 2023 when all is said and done. Now let’s rotate to a conversation on the RTR trading strategy from here. As previously shared, a break back below the 200-day moving average would have us ratchet the portfolio a notch more in that bearish direction. Most notable would be the sale of our most Risk On position, ARK Innovation ETF (ARKK).
Second out the door would be ProShares Ultra Gold 2x Shares (UGL). That is very strongly tied to the movement of the US dollar. The more hawkish the view of future Fed actions...the stronger the dollar...the less appealing for gold. Third might be replacing the ARKK position with a more Risk Off long position like the Invesco S&P 500 Equal Weight Utilities ETF (RYU).
Conversely, the bullish argument is not dead. Just going through a standing 8 count at this time. If things swing back in that direction, with a notable break above 4,200, then we would get longer and longer in the stock market. First out the door would be our recent inverse ETF additions ProShares Short QQQ -1x Shares (PSQ) and ProShares UltraShort Russell 2000 -2x Shares (TWM)...next would be ProShares Short S&P500 -1x Shares (SH). And then bulking up on Risk On plays. Probably first would be Direxion Dialy Small Cap Bull 3X Shares (TNA). And after that would be quality growth and value plays in the POWR Ratings universe.
Anything is possible in this crazy world of ours...but more and more I think the long-term bearish outlook is more likely. And thus should be most prepared for that outcome. Yet as I always share, it is always prudent to be prepared for the opposite to happen so you can act on that sooner instead of being stunned...or hoping things change.
Hope is not a winning strategy. And thus, we strategize based on the facts in hand and adjust accordingly.