When will this “gathering of suckers” end?
Stocks continue to rebound this week, even in the face of very weak earnings for many top stocks.
Because… that’s why.
Remember that a rally in the middle of a bear market is no more significant than a correction in the middle of a bull market. They can occur at any time for any reason.
The key is to realize that the long-term trajectory is unchanged and that we have yet to see the lows of this bear market cycle.
How far could this current rally go?
This will be the subject of this week’s commentary.
Let’s start with the year-to-date chart for the S&P 500 (SPY):
I have also overlaid the 3 key moving averages:
Red = 50 days = 3,842
Green = 100 Day = 3903
Blue = 200 Day = 4,113
The first thing to notice on the chart is how many failed rallies there have already been this year before new lows are reached. This includes the seemingly impressive 18% rally from June to August that lured many investors to spit them out with a move to new lows.
This rally will also fail. Probably next week for 2 good reasons.
First of all, we are currently approaching the 100 day moving average. We could easily run out of steam at this level, especially given the way we ended the week.
This is a TERRIBLE earnings report for Amazon (on top of bad news from Meta and Google) that absolutely has broad significance for the economy heading in the wrong direction. This report from Amazon indicated that stocks were heading correctly lower at the open only to dramatically reverse price at the end of the session with a roaring rally to +2.46%.
This type of reversal is very common for the last gas of a rally before heading the other way. This means that the buying pressure may be exhausted and difficult to break above the resistance at the 100-day moving average (3,903).
Second, and more importantly, next week will bring the most important economic reports for November, starting with the ISM manufacturing on Tuesday. This is followed by the Fed’s rate decision on Wednesday with another hike underway. In the home stretch, we have ISM services on Thursday, then government employment on Friday.
Remember that Monday’s Flash PMI report has already confirmed weakening conditions for manufacturing and services. (49.9 and 47.3 respectively…both below 50, meaning contraction). This bodes ill for the more widely followed and market-evolving ISM releases of this report.
Along with that, we’re still likely in a world where almost everything that happens next week is negative for stocks. Even positive economic news would be a signal that more inflation is in our future, indicating a more aggressive Fed. Thus, I expect the recent bear market rally to wane and investors to return to the mood to sell.
Based on previous comments, I shared the view that the likely bottom for this bear would be around 3000. And if things fall into their typical bear market pattern that occurs in the first half of 2023, just as the economy is likely finding the depths of recession.
Yes, it is possible that stocks will continue to climb for a bit longer, much like the illogical mid-summer rally before new bear market lows were set.
Bear market rallies are called “cupping gatherings” For a reason.
So the word to the wise is…don’t be a sucker.
Expect this rally to die out, starting this week. But likely no higher than the 200-day moving average at 4,100 that capped the last rally.
What to do next?
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This plan has worked wonders since its inception in mid-August, generating a robust gain for investors as the S&P 500 (SPY) tumbled.
And now is the perfect time to recharge, as we will hit even lower lows in the weeks and months ahead.
If you’ve managed to navigate the investing waters in 2022, feel free to skip it.
However, if the bearish argument shared above has you curious about what happens next…then consider getting my update”Bear Market Game Plan” which includes details of the 9 unique positions in my timely and profitable portfolio.
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I wish you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY Actions. Year-to-date, SPY is down -17.15%, versus a % rise in the benchmark S&P 500 over the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, plus links to his most recent articles and stock picks. After…