It’s time to stop beating around the bush. The main topic is inflation and how much damage the Fed will do to the US economy to tame this economic beast. The higher the loss… the more downside for the stock market (SPY). Steve Reitmeister, a 40-year investment veteran, shares his thoughts on the subject. And explains why it’s bearish… and how low the stock should go… and the 9 best trades to profit in this dangerous environment. All that and more await you in the occasional comment below.
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(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
There is a lot of talk about the day to day movement of the stock market (SPY). I want to take a step back from that and discuss what really matters at the moment…inflation.
Everything else is small talk at a dinner party. It is this “elephant in the room” conversation that really gives us the right information about the length and depth of this bear market and thus how we should be investing at this time.
You know how you eat an elephant?
One cut at a time. So, let’s chew through this week’s latest commentary below…
(Online it automatically says “Continue Reading >>”)
We need to stop beating around the bush. The central issue for investors at the moment is inflation:
How trapped? How hard will the Fed have to fight to get it back to 2%? How much will the economy suffer in that process? How will this affect stock prices?
Yes, I have highlighted the last 2 bullets as key elements. Plain and simple, the greater the damage to the economy… the greater the damage to stock prices.
Conversely, if inflation is controlled easily, there will be a shallow bottom for this bear and a more rapid resurgence in the next long term bull run.
But let’s be honest…
Most of us are not economists and do not have the right background to accurately predict this important outcome.
Even worse, economics is an inexact science with experts offering many different interpretations of what happens next. In these respects I really like the work of John Mauldin.
Not only does he do a splendid job of explaining these complex topics in simple terms, but he also usually takes a fairly centrist approach. That means they believe the result is usually not as bad as some people portray… nor rosy. more in the middle.
Given the priority of the inflation topic, I highly recommend that you read Mauldin’s new article below.
Spoiler alert: Mauldin’s article will add to your meltdown.
Not in a scary “end of the world” type way. Just an honest discussion that we all got intoxicated with cheap money because of low rates. Now we are in the grip of hangover.
The next defense in the inflation-fighting war will come with the Fed on Wednesday with its rate decision. I repeat what I said about this in my POWR Values commentary on Friday:
“There is nothing more to report between now and Wednesday as investors await a Fed rate decision. Will it be 50 or 75 points?
Who cares !!!
The myopic short-sightedness of most investment news is criminally insane. Thus, please ignore the price action on that day. The only thing the Fed can say is that the rate hikes are over and the war on inflation has been won in order to get the bulls back firmly.
But that is not going to happen. not even close.
That’s because the Fed told us just a few weeks ago from Jackson Hole that’s not in the cards. And that we have a long-term fight to bring down inflation and that will cause more economic pain.
And yes more economic pain means +0.5% GDP estimates for Q3. This means a potential recession that includes a rise in unemployment. It is not being served at this time, but will likely take top billing in the coming months. And with that the bear market should be on a downward trajectory.”
Add all this up and it increases the potential for further downside for the market. So, let’s talk about the key price areas for the S&P 500 (SPY).
(Note that I had a similar section in Friday’s POWR value commentary. This is the version that best suits our purposes for the Reitmeister Total Return Hedged Portfolio Strategy which is meant to increase in value when the stock sinks low.) .
3,855 = 20% below all-time high. Meaning the point that separates the bull from the bear’s territory. This has been a point of support for the past few days, but I have no doubt that it will break soon as we are hanging on the cliff edge with tonight’s close of 3,855.93.
3,636 = June low. Rarely will you see a correction or a bear market that ends without retracing the lows. This is therefore likely to be the next point of support as we explore the true depth of this bear market.
It can be hard to keep heads under stocks without seeing some of the pain the Fed talked about. Like the job market is finally showing some weakness.
So if we run out there and pain isn’t on the menu yet, it’ll probably be support enough with another juicy boom. As we say in July/August, 18% is not a madness boom. Maybe more like +5-10% waiting for the next economic signals.
If and when the train of economic pain is on the way, the stock will continue to plummet.
3,373 = 30% below all-time high. Maybe some people start fishing around here. I can do that too. Or just start taking profits on our inverse ETFs… but certainly not completely long at the moment. Given the points below.
3,180 = a decline from the 34% high which corresponds to the average decline of a bear market. Another place 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 can be difficult to go below that unless it is actually a much worse than normal downturn. And yes, we can never reduce it here because there will be a lot of buying activity between 3,180 and 3,373. But if we get this low, we will put more money to work in the market for the next bull return. Maybe even back to fully invested.
I am saying all this for 2 reasons.
First, to understand the potential downside and why the hedge is in place to maximize profits on the way down.
Second, to show where we can start taking profits on the hedge and prepare for the next bull market. I would be very tempted to come back 30-40% long in that area around 3,373.
However, given how much valuations have risen in this bull market (the stock is so attractive because of the ultra-low bond rates) they may actually fall more than average. So if we go down to 3,180 there is a 50-60% chance of going long. And if it goes up to 3,000 it will probably be 100% long because the bounce from the bottom will be fast and furious.
Remember no one above or below rings the bell. It will not be easy. And it will be hard to do this at the moment because we will buy when everything looks terrible (economy… price action etc). But in reality, with the stock market it is always “darkest before dawn”.
Or simply it becomes Warren Buffett time… “Be greedy when others are afraid”.
Now you understand why bias has pushed bearish once again. And yes, you also understand from the 18% July/August bear market rally that the road down will not be easy. It requires patience and discipline as it always has unfortunate rallies.
It also requires a plan that we have; Not only to profit on the way down… but to get ready to ride out the next bull market.
What to do next?
Discover my hedged portfolio with 9 simple trades to help you generate profits as the market moves further down into bear market territory. That’s exactly what he did yesterday, generating a welcome profit even though the market fell another -1.13%
This is not the first time I have successfully implemented this strategy. In fact, I did the same thing at the start of the coronavirus in March 2020, the same week the market fell around -15% to generate +5.13% returns.
If you are absolutely sure that this is a bull market… please feel free to ignore.
However, if the bearish logic shared above makes you curious as to what happens next… then consider getting my “Bear Market Game Plan” which includes specs on 9 positions in my timely hedged portfolio. .
Click here to know more >
Wishing you a world of investment success!
Steve Reitmeister … but everyone calls me Riti (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY share. Year-on-year, the SPY has declined by -18.20%, while the benchmark S&P 500 index has gained% during the same period.
About the author: Steve Reitmeister
Steve is known as “Retti” to stock news viewers. He is not only the CEO of the firm, but he also shares his 40 years of investment experience in Reitmeister Total Return Portfolio. Learn more about Reeti’s background, along with links to her recent articles and stock picks.
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