Stocks rallied this past week on the news that a debt ceiling showdown is likely to be averted. To that I say a big, hearty…

DUH!

That’s because politicians never leave their finger in this light socket for long. It is always magically resolved in the nick of time.

When the smoke cleared from this rally investors realized they do not have the resolve to truly break into bullish territory above 4,200 for the S&P 500 (SPY). This likely means more limbo and trading range lie ahead as investors await a REAL catalyst to resolve the bull/bear debate once and for all.

Let’s review why this is the case…and what potential catalysts are on the calendar that could produce the next big move for the stock market.

Market Commentary

The short version of my current market outlook was nicely summarized as follows from my previous commentary:

“There has been a tug of war taking place all year between bulls and bears. It would seem that bulls grabbed the early lead given how stocks shot up near 4,200 by early February…but since then stocks have traded in a narrow range where bulls & bears seem fairly balanced.

Bears will say that the storm clouds are still forming for a recession and deeper bear market thanks to a hawkish Fed dead set on creating a recession to put an end to high inflation.

Bulls will say that the long feared recession keeps NOT happening. And maybe never will. Thus, the lows are already in and the new long term bull market has already begun.

Right now, these 2 opposing views are pretty evenly matched creating a narrow trading range and a considerable drop in volatility. That sleepy action will end when the bulls or bears can wave the victory flag. Until then…the sleepy range bound action will continue.”

(Read the full version of the above commentary here: The WORST Stock Market Ever- Part 2)

Even though stocks rallied this week up to 4,200. Truly nothing has changed to convincingly win the bull/bear battle. In fact, most of the substantive recent news has been negative.

Like Retail Sales coming in at only +1.6% year over year. When you remove +4.9% for inflation (CPI) it shows a -3.3% drop for US retail.

This fits in with the general high inflation narrative that consumers become fearful of waiting to purchase products that leads to a seeming boom in GDP in the near term. This is followed by an economic cliff as demand has been pulled forward. Indeed, that precursor to recession may be happening now.

Those looking to the Fed for signs of a pivot to lower rates should be disappointed by what they heard this week.

First was the Dallas Fed President Logan who said current data does not justify pausing rates hikes yet. Next on Friday morning Chairman Powell was giving a speech reemphasizing that inflation is still far too high and that the Fed would stay “steadfast” in their goal to lower prices.

This means that bulls should once again be disappointed to hear the hawkish resolve the Fed is likely to reiterate at the next announcement on June 14^th.  But even that is not enough to win the day for bears either.

Investors will need to see unequivocal proof of a recession on the way for the bear market to reemerge. This would have stocks breaking below the 200 day moving average at 3,976 and likely retesting the October lows of 3,491…if not lower. (That break below 3,976 should be your trigger to get more bearish).

This has us back on “catalyst watch” for any events that end this bull/bear stand off in convincing fashion. Here is the roll call of the key events on the calendar that could serve as that catalyst:

5/25 Jobless Claims– This will not be strong enough by itself as investors would look for collaboration from the 6/2 Government Employment Situation report. However, if Jobless Claims start to approach 300,000 per week, then historically that has pointed to the time that the unemployment rate is about to rise for quite a while.

5/31 ADP Employment, JOLTs– 2 other jobs reports that often serve as leading indicators of what is in store with monthly Government Employment Situation.

6/1 ISM Manufacturing, Jobless Claims- there have been MANY weak readings for ISM Manufacturing without truly signaling a recession was at hand. However, this is still one of the key monthly reports to monitor on the health of the economy.

6/2 Government Employment Situation- Job adds are expected to keep ebbing lower down to 180,000 this month. Note that population growth demands 150,000 job adds per month to keep the unemployment rate level. So, any movement under that mark could have investors predicting even worse readings ahead. Also, many eyes will be on the Wage Inflation component as that sticky inflation has been clearly bothersome to the Fed.

6/5 ISM Services- Has been in positive territory at 53.4 last month. But if that cracks under 50 into contraction territory it definitely would increase the odds of a recession ahead.

6/14 Fed Meeting- More investors are expecting that they will pause raising rates. But that is quite different than pivoting to lower rates which they still claim is a 2024 event. So, the Powell press conference that follows the rate hike decision will be closely watched for clues of what comes next.

All in all, I still believe we should take the Fed at their word that a recession will take place before inflation is properly tamed. And once that Pandoras Box is opened…then things can get ugly in a hurry with much lower stock prices on the way. That is why I am not tempted to join the bulls even as they are knocking on the door with a potential breakout above 4,200.

Reity, are you saying its not possible to break out above 4,200 now?

I am not saying that because with the stock market anything is possible.

However, looking back at history there have been many false starts to a new bull market that later failed…and failed miserably.

Most notable is the greater than 20% rally from November 2008 through early Jan 2009 that technically marked a new bull market. This sucked in a lot of excited investors only for the bear market to return with a vengeance with lower lows on the way (focus on the arrows in the chart below).

So just breaking above 4,200 for a little while without a clear fundamental catalyst would not entice me to chase stocks because of the great likelihood of it being a “suckers rally”.

Yes, at some point the emergence of the next bull market will make a lot of sense. Right now it simply doesn’t given the still high odds of recession ahead which begets lower corporate earnings and lower share prices (the market has always worked this way…and suspect always will).

So, please continue to stay balanced with in your portfolio which means about 50% long stocks. Then when the CLEAR bull or bear catalyst emerges, then make the rest of your moves to join that bandwagon.

What To Do Next?

Discover my balanced portfolio approach for uncertain times. The same approach that has beaten the S&P 500 by a wide margin in recent months.

This strategy was constructed based upon over 40 years of investing experience to appreciate the unique nature of the current market environment.

Right now, it is neither bullish or bearish. Rather it is confused and uncertain.

Yet, given the facts in hand, we are most likely going to see the bear market coming out of hibernation mauling stocks lower once again.

Gladly we can enact strategies to not just survive that downturn…but even thrive. That’s because with 40 years of investing experience this is not my first time to the bear market rodeo.

If you are curious in learning more, and want to see the hand selected trades in my portfolio, then please click the link below to start getting on the right side of the action:

Steve Reitmeister’s Trading Plan & Top Picks >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return

SPY shares fell $0.64 (-0.15%) in after-hours trading Friday. Year-to-date, SPY has gained 9.88%, versus a % 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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