The bulls charged up to the 200 day moving average on Monday 8/15 and then ran out of steam. Since then, the bears have been in charge with stocks falling about 200 points from last week’s high.
So, who is in charge…Bull or Bears?
And just as importantly…how does the answer to this question affect our trading strategy?
These vital topics will be at the heart of this week’s Reitmeister Total Return commentary.
Bulls will say the recent sell off is nothing more than healthy profit taking after an impressive 18% run up from the June bottom. And that this is just a little breather before the next leg higher.
Bears will say that the past rally was nothing more than your typical bear market rally also known as a bear trap. And that as investors take their heads out of their backsides they are realizing that conditions are still quite bearish.
For example, as if there were not enough inflationary pressures, now we discover that here is a worldwide drought with water levels on major transportation rivers around the world (like the Yangtze in China and Rhine in Europe) are at scary low levels.
What’s the problem?
Less rain = bad for agriculture production = lower supply = higher prices for food
Major waterways with lower water = harder to navigate = higher transportation costs.
This does not help the picture for those that believe last months slightly lower inflation readings were a sign that we were soon on our way to solving this problem without as much Fed intervention that would likely damage the economy. In fact, the Bloomberg Commodity Index Total Return is surging higher. And now 11% above the July lows when investors were so buoyant on the idea that inflation was moderating.
The still evident inflationary pressures are still a big part of the economic problem that has yet to wreak its full havoc on the economy. But also on the price action front here are some stats I found in a recent SeekingAlpha article on Bear Traps (aka Bear Market Rallies…aka Suckers Rallies).
“Bear trap? This stock market rally echoes bear market moves going back to the onset of the Great Depression, according to BofA Securities. The average S&P 500 gain in 43 bear market rallies of more than 10% going back to 1929 is 17.2% over 39 trading days, while in this case, it is up 17.4% in 41 days, making it a “textbook” example. This time around, 30% of the S&P’s gain is due to just four stocks – Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and Tesla (TSLA) – noted strategist Michael Hartnett, adding that another risk for bulls is that whether the “Fed knows it or not, they’re nowhere near done.”
The proof of the above shows up in obvious detail in the many webinars I have done showing the chart patterns of previous bear markets. Painful drops followed by sharp bounces (rinse and repeat many times til final capitulation bottom has been found).
There is virtually nothing about the recent bottom in June that feels like a capitulation bottom. Meaning where all hope is lost and from that darkest hour a true and lasting bottom has been found.
So who is right about market direction…bulls or bears?
For as bearish as I am, I have to admit that the full evidence is not in hand for the bears to be proven victorious at this moment. However, the same is true for the bulls. They need to prove that the Fed can tame inflation without overly harming the economy. This is a high wire act they have failed out more times than succeeded.
This leads to the idea that we are locked in a trading range between the 100 day moving average on the low side at 4,086 and 4,315 which denotes the 200 day moving average. Every move inside the range is meaningless noise.
Meaning that no matter how impressive the rally…if inside the range, then still not proven bullish.
And now matter how intense the drop like Friday or Monday…if still in the range, then it proves nothing for the bears.
The fact is that we could be locked in this range for a while for the investing jury to review all the key evidence. And actually that would be a logical and healthy move. So don’t be surprised if we are in this range for several weeks or even a few months.
It is for this reason that I continue to advocate our hedged strategy that is perfectly built for range bound behavior. In fact, our hedge has generated an impressive +2.12% gain since going into place Monday 8/15 all the while the S&P has slipped -3.92%.
The beauty of this strategy is how easy it is to swing bullish or bearish when the final verdict is in hand. If bearish, then sell off the long stocks and then enjoy the gains that unfold in the inverse ETFs.
And if indeed it the bulls prevail, then do the opposite by selling the short positions so that the gains from the long stocks are allowed to shine through.
Like I have been saying, our strategy is sound. Now let the chips fall where they may.
What To Do Next?
Discover my hedged portfolio of exactly 10 positions to help generate gains as the market descends back into a bear market territory.
This is not my first time employing this strategy. In fact, I did the same thing at the onset of the Coronavirus in March 2020 to generate a +5.13% return the same week the market tumbled nearly -15%.
If you are fully convinced this is a bull market…then please feel free to ignore.
However, if the bearish argument shared above does make you curious as to what happens next…then do consider getting my “Bear Market Game Plan” that includes specifics on the 10 positions in my hedged portfolio.
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
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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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