(Please enjoy the latest investment insights from the Reitmeister Total Return newsletter).

Technically speaking a new bull market has emerged as we have risen more than 20% from the 3/23 close of 2,237 (22.8% rally to be exact). I don’t buy it and believe that this is nothing more than an typical bear market rally.

Is that wise or foolish?

Let’s discuss…

Market Commentary

My goal today is to explain why I think this is nothing more than a bear market rally with more downside on the way.

And yes, I totally understand how scary this is for sure as the FOMO is starting to kick in for all of us. However, this is just standard fare for any bear market.

I gave detailed insight on this in the 4/6 RTR Members Only Webinar.

Yes, I recommend watching it all as I cover a lot of vital ground that is very applicable to this conversation. But if you just want to narrow down to the slides of past bear markets with many false rallies before lower lows, then fast forward to 17 minutes and 20 seconds into the video.

Next is this main section from yesterday’s trading alert:

“As for the overall market, yesterday was an interesting rally based on the premise that Europe is seeing a decline in the daily rate of new Coronavirus cases. That was a ray of hope the same could happen in the US leading to the bounce.

I have a hard time holding to that same optimism because I don’t believe this is a proper assessment of how much damage has already been done to the economy that will mean weaker economy…lower earnings…and lower stock prices.

Nor does it take into account that a reduction in cases is not the same as the removal of risk from the population. And thus, still people should expect at least another 1-2 months (and perhaps 3-4 months) where we still spend the majority of our time out of public places. That equates to…

Less spending > lower corporate profits > more cost cutting > more layoffs > lower income > less spending…and the cycle continues grinding lower into the future until it is played out. And rarely is it played out this soon.

That is what Cramer was getting to in this article as the focus on the Coronavirus peak is missing the point about the problems with employment and how that will weigh more heavily on stocks overtime.

And it does have some parallels back to the bear market of 2008/2009 where we can say that the Financial Crisis had an epicenter in September 2008. And even after the big tumble there were 2 serious bear market rallies (+18.5% starting October 27^th and then again +24.2% starting November 20th). But both of those rallies were ill fated as we did wind up at a much, much lower bottom later in March 2009.

This happened because the full extent of the economic pain was not truly appreciated early on. It takes time to see the downward cycle take full effect. And what that means for jobs>sales>profits>share prices.

And given that we are only 1 month into this cycle, I don’t think that the market has properly discounted the full extent of the pain. Which is why for now I am holding firm with the bear market premise even as some would say it technically becomes a new bull market with a close above 2684 (20% bounce from the lowest close of 2,237 on 3/23).”

(Get more insights like this by starting a 30 day trial to the Reitmeister Total Return newsletter).

OK the backdrop from our previous conversations is in place. Now let me share some fresh insights that help to solidify this still bearish view.

Yesterday the NFIB Small Business Optimism plummets from an impressive 104.5 down to 96.4. That is the largest monthly decline in survey history.

Note that most of the responses were gathered in the first half of the month. So likely the next reading will much starkly worse. Another important note from the survey is an additional question was inserted about how long they could SURVIVE under current business conditions. The average answer was 2 months.

Yes, that last part is scary even with the thought of Government stimulus and loan programs because it tells you how many companies will shed employees to be on the safe side. And how many will shutter their doors altogether. That is NOT fully baked into the current stock market cake as stocks oddly head higher.

Now let’s turn to a guy who knows a thing or two about the economy and financial crisis. Ben Bernanke doesn’t see a V-Shaped recovery. And here are his key insights:

“I don’t think it’s going to be a rapid” bounce back, he told a virtual discussion hosted by the Brookings Institution on Tuesday. “We’ll probably have to restart activity fairly gradually and there may be subsequent periods of slower activity again.”

While he said the economy could contract at a 30% annualized rate or more in the second quarter, Bernanke brushed aside comparisons to the 12-year-long Great Depression. “If all goes well in a year or two we should be in a substantially better position,” he said.

Yes, it is fine to brush aside the notion that this will be a 12 year depression. That is because Ben re-wrote the book on how the government and Fed should properly respond to an economic crisis.

However, if you read his quote correctly he is saying that the notion of a V recovery is not correct and that we will likely have an extended period of economic decline. And if true, then it should be a prolonged bear market with this rally being ill fated.

Now let’s look into our crystal ball for tomorrow. The weekly jobless claims is expected to come in at another 5,000,000 on top of the 10,000,000 already lost in the previous 2 weeks.

That is 10% of the working US population of 157 million workers in just 3 weeks time!!!

OK, it is not really as bad as it sounds since many of these people have really been furloughed by retailers, restaurants etc and will be hired back once they reopen. But it’s definitely not a good thing either. And I don’t believe that this rally takes into account how this # will likely double or more in coming weeks. And how that much lower income in the economy will dramatically hurt spending.

But Reity…how about those stimulus checks?

Yes, that helps for sure. But the average family income in the US now stands at $75,500. After taxes that comes out a little north of $4,000 per month. And the top stimulus check amount is $3,400. So you can see it doesn’t close the gap on a family that just lost its income after month 1.

Plus you have the idea of sentiment which is plummeting for both consumers and business by the second. The lower the sentiment the less money will actually be spent. That is because if you are afraid of losing your job, or future profitability of your company, then you will only buy necessities. And that hoarding of cash, instead of spending, hurts the economy…which is another negative for stocks.

(Get more insights like this by starting a 30 day trial to the Reitmeister Total Return newsletter).

Reity, are you saying its not possible that this is indeed the new bull market emerging?

It is possible. Just not probable. Plenty of logic as to why in the paragraphs above. But this would be the key segment from above to rebut this notion:

“And it does have some parallels back to the bear market of 2008/2009 where we can say that the Financial Crisis had an epicenter in September 2008. And even after the big tumble there were 2 serious bear market rallies (+18.5% starting October 27^th and then again +24.2% starting November 20th). But both of those rallies were ill fated as we did wind up at a much, much lower bottom later in March 2009.”

Reity, is there some point where you would throw in the towel and join the rally if it continued?

Yes. I don’t know the exact price point that would make me do it. Maybe above 2800. Or the 50 day moving average right now at 2919. But without a true improvement in the economic outlook as stated above, I would just have so much fear that it would be a Murphy’s Law type thing. Meaning the market would implode the minute after we joined the rally.

And if I did start to join the rally, then likely it would be step by step. Like the initial step going from the current 0% long up to 30-50% long. And if all is well, then ratchet up another 20-30% and so on. This way, even if stocks did retreat it would not be as painful as being 100% gung ho bullish.

To sum it up…nobody said this would be easy. And bear market rallies are about as difficult an experience as there is.

That’s why they are often referred to as “sucker’s rallies”. Part of that is getting “sucked in”. And part of that is you feel like a “sucker” when you get in right at the top of the move.

So yes, I believe that staying in the hedge is the right course of action. You do not have to 100% agree. The key is that you know where I am coming from and use it to adjust your strategy.

Meaning that some of you are way more gung ho bearish than I am. And you are using every rally to add more and more to your short/inverse positions. So for you, this likely bolsters that point of view.

Whereas some of you are very compelled to join the rally. Especially if you have a more technical bias to your trading. So perhaps this commentary has you still joining the rally…but maybe putting a bit less in at this moment given the odds that indeed the bear market is still in full effect.

That’s the story for now. Will continue to update as things evolve.

What to Do Next?

If you believe this rally is for real, and the next bull market is coming to life now…then stop reading here because we are not on the same page. And I wish you the best of luck.

However, if you suspect this rally is too good to be true and want advice on a strategy to produce profits as stocks go lower then read on…

Right now I have created an effective hedged portfolio of 6 stocks and 4 inverse ETFs that is reserved for subscribers to the Reitmeister Total Return newsletter.

These positions have formed a hedge that allows investors to enjoy gains while the market tumbles lower. And actually this recent false rally has created a great opportunity to get on board this strategy now before the next leg lower.

I know its crazy out there. And I am trying my best to help investors make sense and profit from the situation. The best way for me to do that is give you 30 days access to the Reitmeister Total Return.

This is my newsletter service where I share more frequent commentaries on the market outlook, trading strategy, and yes, a portfolio of hand selected stocks and ETFs to produce profits whether we have a bull…a bear…or anywhere in between.

Just click the link below to see 6 stocks and 4 inverse ETFs in the portfolio now, and all the future trades as we find bottom on this bear and the new bull emerges.

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SPY shares rose $2.82 (+1.03%) in premarket trading Thursday. Year-to-date, SPY has declined -14.36%, versus a -14.36% 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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