Last week I was a “Doubting Thomas” when it came to the staying power of the recent S&P 500 (SPY) rally. It just looked like yet another in a long line of failed bounces in 2022 before the next leg lower. Gladly this recent bounce gave us the opportunity to take more profits off the table while moving the POWR Value portfolio down to only 69.5% long the stock market (and created a hedge in Reitmeister Total Return where there is more of a market timing element to the trades. And yes, that portfolio actually rallied this week as the market tanked). The point is that the odds of bear market are increasing by the day. And right now we are amassing a 3rd assault on a break into bear market territory (below 3,855). The reasons why that probably takes places is shared in this week’s POWR Value commentary. Read on below for more….
(Please enjoy this updated version of my weekly commentary from the POWR Value newsletter).
The main headline today is “Inflation is STILL Too Hot” after the not so surprisingly high +8.6% CPI report. This had the positive pre-market futures diving into negative territory in a hurry culminating in a -2.91% slashing of the S&P 500.
Thus, we end the week a mere 45 points away from bear market territory at 3,855.
On top of that the Consumer Sentiment announcement today was the lowest reading since May 1980.
What’s the similarity between that time period? RAGING INFLATION just before a recession and bear market.
The sad fact of is that the Fed is WAY behind the curve. Truly they should have been raising rates and shrinking their balance sheet 6-12 months ago. Thus the odds of them managing a soft landing are between slim and none (and yes, slim may be leaving town 😉
Hey Reity, how about yesterday’s Jobless Claims report? Sure seems like employment is still in good shape.
Jobless Claims on absolute basis are still low at only 229K per week. But directionally the news is not good as seen by the graph below showing 3 straight months of trending upwards.
If that continues, which is likely, then it will also start to show up in lower job adds. Then at a certain point job losses and worsening of the unemployment rate.
Remember that employment is a lagging indicator. Meaning one of the last economic data points to show weakness. Kind of like a smoke detector that goes off after the house has already burned down.
However, even this early in the game of looking for a recession there are cracks in the employment foundation which is yet another reason we have gotten more cautious now.
In Tuesday’s Reitmeister Total Return commentary I gave a lot more insight to show why the odds of recession and bear market are increasing. So check that out now if you have not already because there is lots more economic evidence and well reasoned insights from other investment experts.
Speaking of other investment experts, this news piece caught my eye today. That being famed investor, Stan Druckenmiller, is yet another in a growing line of pundits who sees this as a bear market with more downside ahead.
One of the things we have to remember is that we have smaller portfolios and thus can literally turn on a dime to go from bullish to bearish. So that often has us hanging on til the last second to make changes.
However, folks like Druckenmiller have BILLIONS of dollars invested…they can’t turn on a dime. Some of their positions are so large that if they sold them all immediately they would crush those stocks by themselves.
Plus they are watched closely by other investors which would have other everyone running for the hills.
So they need to make their moves bit by bit in stealthy fashion over a longer period of time. That is why they often call “bear” so early in the game when the rest of us can’t truly see it with such clarity.
However, part of our job is to appreciate “pattern recognition“. As in appreciating what happened in previous bear market periods BEFORE IT WAS TOO late that would tip the scales in a direction that we too should start heading for the hills.
Reity, sure sounds like you are ringing the bear market bell…are you?
I have certainly tipped over the 50% likelihood line that odds of recession and bear market are more likely than continuation of the bull. And perhaps now sliding to 60-70% likelihood in my head.
But that shrinking 30-40% chance of bull market continuation is large enough to make me stop in my tracks from doing more at this time.
Because if the market does bounce again and stay on bull track then it could happen very rapidly that create serious damage to any investor leaning too hard in a bearish direction.
Thus, the 69.5% long in POWR Value (and totally hedged in Reitmeister Total Return) is good enough til we see if indeed a break below 3,855 is in the cards.
If so, then POWR Value will likely wind its way down to the new minimum charter of 50% long…but in more conservative positions to mitigate damage.
Whereas in Reitmeister Total Return I will get rid of the long side of the hedge to make more money on the inverse ETFs as we likely see a 30-40% total decline in this bear round (34% is the average bear market decline).
For those doing math at home that would be a likely outcome of 2,891 to 3,372 for the S&P 500. Yikes indeed!
You know the expression it; It is happy hour somewhere
Same could be said this way for investors: It is a bull market somewhere
That bull market just may be in shorting stocks. (read that one again so it sinks in).
If you are not comfortable with that…then my friend…don’t be an investor. Just hand the money to an advisor riding out the highs and lows overtime. And yes, sometimes that means losing a third to half your money when the next bear comes.
However, if you want to have any honest appreciation that there is an economic cycle which creates bull and bear markets…then you have to appreciate it is as natural as night following day. Gladly there are ready made solutions for making money in each environment.
Yes, less people know how to do it during a bear market. But heck, I just laid it out for you. Not that hard when you think about it.
So if the definition of insanity is doing the same thing and expecting a different result. Then let’s stop that insanity train this time around by you trying something new that actually works for a change.
OK, I am getting off my soap box. I suspect that this coming week is the make or break for this market. We are prepared for either outcome. Let the chips fall where they may and we will react in kind.
Our portfolio has beaten the market for 4 straight weeks including a nearly 3% advantage this past week alone. Now as we roll back the clock a full month, we see the following:
-0.90% for S&P 500
+7.23% for POWR Value
I hope that brings a smile to your face on an otherwise somber day for investors
What To Do Next?
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All the Best!
CEO StockNews.com & Editor of POWR Value trading service
SPY shares closed at $389.80 on Friday, down $-11.64 (-2.90%). Year-to-date, SPY has declined -17.67%, versus a % rise in the benchmark S&P 500 index during 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 firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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