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I have been straight up bearish as shared in recent commentaries like:

Is This a Suckers Rally?

New Bull Market? Or New BS?

However, one of the most wide spread pitfalls in the investing world is something called the “confirmation bias”. In essence that means that many of us only read articles that confirm our preconceived notions giving us a false sense of certainty in our investment decisions.

That is why I believe it is so essential to step into the shoes of the other side. To appreciate where they are coming from and to see if it potentially alters, or somewhat tempers your investing approach.

That was my mission this weekend. To make sure I took into account why some people believe that the bear market bottom is in and a new bull market is emerging. At the end I will tell you my updated view on bull vs. bear case and how it may alter our future investing approach.

Here is a basic summary of the bull case:

The Worst of the Virus is Behind Us

More and more of the models show that the spread of the virus in the US will be lower than previous stated. That is because social distancing and shelter in place are working to slow the rate of daily news cases which may have peaked on April 4^th. And if so, then the rate of daily deaths will also peak fairly soon. These improvements kind of go hand in hand with the next topic which is beneficial to the economy and stock market.

Economy May Start Opening Up in May

Europe is about 2 weeks ahead of us on when the virus started wreaking havoc. And also about 2 weeks ahead on when the rate of new cases started to peak. Their governments are now contemplating the best strategies for how to re-open their economies.

The US will be able to see the best of these practices to determine their path forward to improve the economy while trying not to see new cases spike once again. Meaning that being late in this game is a good thing for determining the best strategies based upon the results in other countries. But to sum it up, the idea that the economy “could” start to reopen as early as May sparks the hope for a V shaped recovery. Or at least, not as lengthy of an economic downturn.

Technical Point of View

Technically speaking a bear market ends and a new bull market starts after a 20% gain from bottom. We crossed that market about 150 points ago on the S&P. Plus there is the notion that the market likes to “Climb the Wall of Worry”. Meaning to rise while bad news is still in the air. You add these things together and many technicians will tell you the new bull has already arrived.

(Even though I am trying to lay out the bull case uninterrupted, I can’t help but to interject here that there have been many bear market rallies of this size before heading to new lows. So I believe there should be greater focus on the fundamental aspects such as containment of the virus and return to normal for the economy).

BIG Government Response

The Fed and the Government did respond early and did respond in a big way which should help mitigate the total damage. Everything from lower rates to industry bailouts and loans and stimulus checks. And clearly they are ready to do more if needed. This shows that they understand the playbook that worked so well during the Great Recession and should help lessen the overall pain and shorten this recession.

Low Oil Prices is Another Stimulus

The oil industry and oil investors may not like lower oil prices…but everyone else does. It is said that a $1 drop per barrel can be up to a $10 billion a year stimulus to the US economy. Even with the recent agreement to cut energy production by 10% many look at it as too little and too late when, ready for this?…gas consumption is down 48% in March in the US alone. Yes, that is how severe the problem is for the industry and they are running out of capacity to store the extra oil. So in the end, we all should expect low oil prices for quite some time and that will be another large stimulus on top of all the Fed/Government stimulus.

Low Rates Makes Stocks More Attractive

I have written on this subject many times. That the lower bond rates are, the more attractive stocks are by comparison as being able to provide a superior rate of return for investors. The key to that equation is how much earnings and dividends a company can produce which certainly grows dimmer during a recession. But if you see the other side of the recession…with increasing earnings and increasing dividends, then putting money to work in stocks starts to make more sense than interest bearing investments like cash and bonds.

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Which Case is Stronger: Bull vs. Bear?

I don’t want to dispute each and every claim. Because that tit for tat would have this piece being unnecessarily long. So let me sum it up this way…

The bull case has some virtue and is plausible. I just think the bear case is much more likely because we have not seen all the economic damage that is to come as the typical vicious cycle of a recession continues to grind lower. Here is that vicious cycle equation:

Drop in sentiment > lower spending > lower income > cost cutting > job loss > rinse and repeat cycle til bottom is found.

This is what the Fed’s Neel Kashkari alluded to in this recent article that recover could be a long, hard road. And famed economist Robert Schiller weighed in recently about how the pandemic of fear comes with higher unemployment that could result in a longer term depression.

There is a reason that the average bear market is 13 months long. Because you have to see how many rounds of this downward cycle takes place before a true and lasting bottom forms. Just like the Financial Crisis starting in September 2008 had many false rallies (+18% in October and then +24% in November/December) before a much lower, lower was found in March 2009.

But low rates creates a higher floor under stock prices. And the much quicker and much larger Government response, along with the benefit of low oil prices helps us see the other side of the recessionary canyon and thus potentially less need to explore a more drastic decline.

This could possibly lead to an extended tug of war between bull and bear that I discussed in my 3/13/20 article: Long Bear vs. Short Bear?

Here are the key excerpts:

“This is kind of a melding of the first two ideas (Long Bear vs. Short Bear). Yes, it lingers around longer because of the economic damage that is likely to unfold. But since investors still see it as a temporary event, then they keep buying up every move lower.

This would be the most annoying outcome because there would be so many false starts and would make you feel like giving up. But it’s completely plausible since there are already so many investors who appreciate the long term attractive buys now displayed before them. But until the full extent of the economic damage is fully understood, it will be hard to get a lasting recovery.

In this scenario we go for the same industry groups as noted above. (energy, industrials, airlines, travel/leisure, entertainment, restaurants and anything else that was about people being together in public.) We just keep averaging our way in on the dips with conviction that in time we will see ample reward.” 

Let’s say the above is true. That it’s not a bull market yet. While at the same time we “may” have found bottom of the bear. This could set up for a long period trading in a range until investors are more convinced of things getting much worse or much better. If worse, then lower lows will be found. And if much better, then yes new bull market emerges.

If trading range scenario does unfold, then I don’t imagine the upper end is much higher than the 50 day moving average at 2910. And the lower end is around 2200 which is the recent low. If this is true, then it is hard to be a buyer so close to the top of the range. Instead we stay in the hedge and then use dips to load up on the most beat down groups.

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To sum up. There are 3 possibilities at this time. Here they are from most likely to least.

Bear Market: This is still the most likely outcome with retracing to previous lows and potentially much lower if some of the predicted economic damage does unfold (like 20-30% unemployment). And especially if the virus lingers in our lives much longer (which most experts say is the case). Like the idea of a virulent return in the Fall that could cause a new wave of lockdowns and economic carnage. If so, then staying in our hedge is the right call as it will produce profits on the way down as we are seeing today.

Trading Range (2200 to 2910): Given that we are closer to the top of the range, then stay in the hedge for likely swing lower, then look to buy into most beaten down groups on future dips.

Bull Market Emerging Now: This is the least likely, but even if the case, it is doubtful that would keep surging higher at this time given all the pessimism that still lingers. So don’t let the FOMO grab you too hard at this time.

More likely we would sink lower from our current position allowing better entry points into long term positions. And once there is a bit more proof that society is getting back to normal, then a more lasting bull will emerge and we all get back to 100% long in more growth oriented positions.

Yes, that was a lot of ground to cover without any trades. However, it is an important strategy piece that sets us up for the possible trades that are to follow.

One last thing for today. This is my 3^rd bear market as an investment professional. Each has been completely different in cause, shape and outcome. (2000 to 2002 vs. 2008 to 2009 vs. 2020 to ???).

But there is one strange commonality. Some customers who join my service during the bear market get upset when we start to become bullish. Even if it is a profitable move to start buying stocks these folks still get upset.

Why? Because some believe it is a badge of honor to be bearish. And that we made a blood oath to remain members for life.

But my club is the investment profitability club. And sometimes it makes sense to be bearish. And sometimes it makes sense to be bullish. And sometimes it makes sense to straddle the two worlds when the path forward is not crystal clear.

I am sharing this notion with you now so you don’t let pride or ego get in the way of shifting out of bearish hedge into a more bullish posture when the time is right. I just don’t believe that time is now.

I look forward to sharing investment success with you for many years to come!  

What to Do Next?

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SPY shares were trading at $273.54 per share on Monday afternoon, down $4.66 (-1.68%). Year-to-date, SPY has declined -14.51%, versus a -14.51% 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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