The S&P 500 (SPY) is on the verge of a pivotal breakout and the bulls once again appear ready to take over. That’s why I say “stock buyers beware!”. That’s because it could be yet another false start for bulls who don’t understand the big picture, which points to more bearishness for stocks in the coming weeks and months. Read the full story below.
The bull-bear tug-of-war has reached a critical moment again, with more than 4,000 people fighting between the two sides. The previous two skirmishes were won by the Bears.
I’m referring to the large rallies that lost momentum in mid-August and early December. A hawkish Fed has been the main catalyst in turning things back to the downside every time.
Will this happen again after February 1st?Yingshi Fed announcement?
This is the topic most deserving of our attention at the moment and will be the focus of this week’s Reitmeister Total Return commentary.
A condensed version of today’s review could easily be tagged as: Stock buyers beware!
This is because the price action tells one thing…but the fundamentals tell another, and the final verdict will likely come after the Fed’s 2/1 announcement.
Now let’s go back to the beginning and assess where we are now, possibly breaking the long-term trendline. Also known as the S&P 500’s 200-day moving average (spy) in red below.
Yes, we seem to be forming a breakout at this point. However, look at how similar events played out in late March and late November before the bears took power again.
Chartists will also note that this is still quite bearish. First, because we are officially in a bear market. We need a break above 4,189 to show that a bull market is in place.
Second, we have a series of lower highs, which is a negative trend until it is officially reversed.
To be clear, this could be the formation of a new bull market. You should never completely ignore the wisdom of the crowd that emerges from price action.
Viewing this in the context of no fundamentals, however, feels a bit hollow. So let’s turn in that direction where we have another intersection. That’s investors who only care about what’s going on with inflation (and what the Fed might do going forward), not those who think a recession is in the making.
This battle was at the center of my last review: Investors: keep your eyes open. The theme is, yes, inflation has come down faster than expected. But before you cheer the good news, it’s because a recession is in the making, which is often the root cause of bear markets.
Recession forecasts only got bleaker this week, with leading economic indicators reading below expectations of -1% from Monday. Check out this quote from Ataman Ozyildrim, senior director of economics at the Conference Board (who created this indicator):
“The US LEI fell sharply again in December – continuing to point to a near-term US recession. Leading indicators were generally weak in December, pointing to deteriorating conditions in the labor market, manufacturing, home construction and financial markets in the coming months. Overall economic activity could turn negative in the coming quarters before picking up again in the final quarter of 2023. “
This was followed by a flash reading of 46.6 from the S&P Composite Purchasing Managers Index on Tuesday. That’s a pretty bad performance, as the services sector at 46.6 was on par with manufacturing at 46.8. (Remember under 50 = tight environment).
These poor economic data make it difficult to be bullish at this time. To make matters worse, we’re soon heading into the next Fed statement on February 1st, where they may repeat their “long-term high interest rates’ Mantra.
The bulls keep jumping out of the guns, expecting the Fed’s turn only to be hit again. That was the case in mid-August, when an 18% summer rally ended with Powell’s famous Jackson Hole speech, sending us to new lows in the coming weeks. Then, the October/November rally ran out of steam when Powell poured cold water on his bullish aspirations for higher long-term rate expectations.
To be clear, the Fed is undoubtedly seeing the same signs of a slowdown in inflation. But it is also clear that there will be no change in their stance, as they have not changed in nearly every Fed speech in January, including a similar one from Powell.
These guys sing from the same playlist on purpose. This is part of their mission to provide clarity to all market participants. So, once the 2/1 announcement borders on frenzy, expect them to drop higher and longer mantras.
Yes, they may downshift to a quarter point hike. This seems appropriate at this time. But that’s very different from ending rate hikes or cutting them in time to avoid the formation of an immediate recession.
Ultimately, the bulls are likely to continue to control price action ahead of the Fed’s 2/1 announcement. That could make the stock look like it’s breaking out, with some investors being lured by severe FOMO.
But, getting back to the topic of this article, I would strongly say; Stock buyers beware!
Simply being bullish into a 2/1 announcement now seems rather risky given the facts at hand. The bears still have the upper hand, unless it turns out otherwise.
If, by some surprising stretch of the imagination, the usually slow and steady Fed officials do a 180 on 2/1 and become undeniably dovish, surely join the bull party that afternoon.
Long story short, the downside risk outweighs the upside, which is why I’m still sticking with my bearish portfolio and recommending the same to others.
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If you’ve successfully navigated the investing waters in the past year, then feel free to ignore.
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I wish you a successful investment!
steve leitmeester…but everyone calls me Reity (pronounced “Righty”)
CEO of StockNews.com and Reitmeister Total ReturnEdit
SPY shares rose $0.81 (+0.20%) in after-hours trading on Tuesday. Year-to-date, SPY has gained 4.65%, while the benchmark S&P 500 has gained 4.0% over the same period.
About the Author: Steve Reitmeister
StockNews viewers are more familiar with Steve as “Reity”.Not only is he the CEO of the company, but he also shares his 40 years of investment experience Reitmeister Total Return Portfolio. Learn more about Reity’s background and links to his latest articles and stock picks.
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