‘The Fed-fueled fantasy bubble has popped.’ Stock investors are detached from reality — but they’re about to get a big dose.

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After the US stock market hit an all-time high last year, I spoke with Jeffrey Berman, a professional stock-trader with more than three decades of experience. Bierman also lectures on TheoTrade.com and TheQuantGuy.com, and is an adjunct professor at both Loyola University in Chicago and DePaul University.

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In the SPX of the S&P 500,
+1.19%
High He predicted a drop to 3600 or lower in 2022, and he was right. I recently discussed with Berman his latest projections and strategies for US stocks:

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market Watch: What strategy do you suggest for investors in this environment?

Biermann: Firstly, you cannot be 100% in stocks. Second, you have to look for produce. The yields on bonds are competitive with stocks right now. If you can get 4% for a bond with half the risk of the S&P 500, it pays to buy the bond because the yield is safer and volatility is lower. Move more towards fixed income and away from high beta stocks with high multiples. Because there is little or no growth in bear markets. Price dominates in a bear market, and growth dominates in a bull market.

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market Watch: How do you know it’s still a bear market?

Biermann: If it looks like a duck, walks like a duck, and quacks like a duck, then it’s a duck! Most of the stocks are trading well below their 200 day moving average. Moreover, even when good news comes out, most of the stocks do not move at all. Finally, during the past few months, money has been flowing out of stocks and into bonds. All these clues suggest a bear market.

market Watch: If you are right, when will this bear market end?

Biermann: When growth stocks tend to underperform and value stocks tend to outperform. Then investors throw in the towel on growth stocks. Only then do we know we are nearing the end of the bear market.

market Watch: Is it time to start looking for a new bull market?

Biermann: not even close. The final stage of a bear market is capitulation, when investors give up. Retail investors are worried right now but not rich. If we hit 3600 on the S&P 500, the rich will be worried. But beware of fakes. The market is likely to decline below 3600 and bounce back. That’s when everyone thinks the bear market is over. Instead, you get one final flush.

market Watch: How should traders approach this market?

Biermann: You must be nimble. Trade in a short range. This is not a market where you will find a “gamma squeeze” (when stocks soar over short time periods). Traders need to take profits quickly and often, and should not reach for big swings or big moves. I call this the “fit and start” market.

market WatchQ: How do you personally trade this market?

Biermann: I trade in large-cap and mid-cap stocks, not small-caps. I also do small size business. For example, I have $125,000 in one of my accounts. The largest position I have is $4,000 to $5,000. I never trade more than 1% to 3% of my entire portfolio on a single position. You should never trade more than 5% of your portfolio in one position. small business.

, ‘I call it a slow bear market – think of it as a progressive stock bloodbath.’ ,

market WatchQ: What is your forecast for US stocks in the near term?

Biermann: I want to be conservative in my estimates. Realistically, we tag 3200 to 3300 on the S&P 500. In the worst case scenario, we can tag 3000 this year. The best-case downside projection is 3500.

market Watch: So even in your best-case scenario, stock investors will still feel more pain before conditions improve.

Biermann: I’m no Darth Vader, but yes, I expect it to be worse, but not exceptionally bad. We’re not in a 2001 or 2008 bubble, I call this a slow motion bear market — think of it as a progressive stock bloodbath. This would fool a lot of people. Think of a frog in a hot bath that gets hot. By the time the water boils, the frog is dead.

market Watch: Why are stock investors in such a tough spot now?

Biermann: The market rests on the Fed’s easy money. After the 2008 housing crisis, a handoff occurred from Bernanke to Yellin to Powell using quantitative easing. Instead of the usual 4% to 5% interest rates, they went up to almost zero. It was like a game of limbo – how low can you go? With the low-interest rate mindset, the market fell into complacency, then confusion. Fed had a chance to remove the punch bowl at 3400 [on the S&P 500] But didn’t choose. Then we went past about 1400 points. It is the extra that has to work.

market Watch: Isn’t a high stock price a good thing?

Biermann: It is different from reality. It is like an automatic brainwash where fundamentals and values ​​are no longer relevant. The only thing that matters is that the Fed is providing easy liquidity and to hell with anything else. This helped create an inflationary bubble and suddenly the market mindset changed. Last year was a wakeup call. Reality check happened for the first time in 10 years. That’s when people realized that the Fed could not always stand behind the market and keep interest rates at zero.

market Watch: How long will it take for investors to get real about market conditions?

Biermann: People are slowly realizing that something has changed. People were living in a fantasy world by the three fed chairs. It damaged the mindset of the average person. Even many pros have drunk the Kool-Aid and believe that nothing matters except the Fed’s liquidity policy. As you can see right now, the market can’t seem to get any traction. The Fed-fueled fantasy bubble has burst.

Michael Sincere (michaelsincere.com) is the best-selling author of “Understanding Options” and “Understanding Stocks.” His latest book, “How to Profit in the Stock Market” (McGraw Hill, 2022), is aimed at advanced short-term traders and investors.

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Credit: www.marketwatch.com /

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