(Please enjoy the latest investment insights from the Reitmeister Total Return newsletter).
We moved to 32.5% short the afternoon of Friday May 8th when the S&P closed at 2929. Immediately the following week stocks tanked and our move looked brilliant. Yet even then I was skeptical of what happens next saying things like this from 5/13 weekly commentary:
“Perhaps the action the past few days is a growing acknowledgement by other investors that they finally got the memo. Or maybe this is just another pullback before testing 3,000 once again….and then finally heading lower in earnest. We can patiently wait for either outcome.”
The market bounced back a little the next couple sessions. Then it roared back to life starting Monday on the news of Phase 1 testing of Moderna’s vaccine trials.
Here again the logic in that elation is not well founded when you dive into the reality that, at best, it would arrive on the market 7-9 months from now. And certainly there would be a lot more economic damage in that time period. (Full analysis from my 5/18 commentary here).
For me there is no change in the fundamental outlook. It is bleak for the 1001 reasons already given. And fully expect a continuation of the bear market once this suckers rally is over.
Yet, why do stocks continue to rise?
Let’s break that down to understand where we are now and what is likely to come.
The initial decline to 2,220 was a non-stop torrent of pain with many sessions down 3-5% and even a dreadful -10% day thrown in the mix. So in just 3 short weeks the market did as much damage as the typical 6 month bear market. This created oversold conditions with a bounce as a very logical next step.
By a bounce I mean you would have expected 1-2 positive weeks with a 8-15% overall market rise from bottom. And then the pain party continues.
And yet as I write today it has been about 9 full weeks of rainbows and lollipops for stocks and now much closer to the all time highs of 3,392 than the all time lows.
So who was buying if most people you talk to are bearish?
Here is what I said on that topic in my 5/1 end of the week commentary:
“I also wanted to share some insights with you from a conversation I had Thursday with Marc Chaikin, head of the famed research firm Chaikin Analytics. Marc is bearish just like me given what he sees in both the fundamental and technical picture.
So I ask him…if you are bearish…and I am bearish…and every single investor I know is bearish…then who the heck is buying?
His answer was right on the money. THE COMPUTERS!
Yes, the algos and high frequency traders are the main players buying because they saw the momentum taking place and just kept pressing it to the extreme. And the more the market went up, the more the FOMO kicked in for some others and this rally got way out of control.
However, once the momentum is regained to the downside, than these same computer traders will Sell just as hard because that’s where the momentum will be found.
In essence this explains how the market got so disconnected from the horrifying fundamentals on the ground…”
So if the computer traders started this mess. Then likely they will end this mess too.
What I have discovered over the years is that the algos and HFTs like to focus on key technical levels. Not just touching them. But blowing through them AND THEN reversing course.
Well if that is true, then there is no more serious technical level than 3,000. Not only is it a BIG psychological hurdle, as all century marks on the S&P tend to be. But it also combines with the key long term trend line of the 200 day moving average which is currently 2,999. Put them together and you have a super-fortress of resistance.
So if this plays out as I suspect, then we will not just touch 3,000. We may well blow through it sucking in more FOMO players and then FINALLY reversing course.
If I am right, then we need to resist the initial pull to get long on a breakout above that level because it really would be a fake out before the pain train pulls into the station. It will not be easy resisting the FOMO…but we must at first given the odds of the downside behind this door.
So buckle up for the wild ride that will likely ensue after flirting with 3,000. I know what I think SHOULD happen. But we are prepared for anything that COULD happen.
What to Do Next?
Please remember there has never been a V bottom in bear market history. And typically you retest bottom, and often find lower bottoms, before the bear is all said and done. So that says we are likely to make our way back to 2,200 achieved in March…and perhaps much lower.
When you balance out risk and reward it points to being bearish at this time. Which led me to create this portfolio for the Reitmeister Total Return newsletter that is 32.5% short the market. This portfolio includes:
- 3 stocks uniquely attractive in this sluggish environment
- 1 Gold ETF because when there is a crisis and the world governments are in a race to devalue their currencies, then gold typically rises.
- 3 Inverse ETFs to mop up profits on the downside. And no, shorting the S&P 500 is not one of the selections. That is too conservative. These 3 inverse ETFs will gain much more as the market tumbles.
If you would like to see more of my market commentary and the hand-picked portfolio of 3 stocks and 4 ETFs to profit as the market heads lower, then learn more by clicking below.
Wishing you a world of investment success!
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares . Year-to-date, SPY has declined -7.67%, versus a -7.67% 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. More...
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