I decided to put out my weekly commentary a day earlier than expected because the shocking rally this afternoon deserves comment as we shockingly broke above the fairly important 200 day moving average for the S&P 500.

The short version is to say…this rally makes no FREAKIN’ sense!

The longer and more reasoned version is shared with you below…

Market Commentary

The main event this week was Chairman Powell’s speech on Wednesday when stocks went from modest red arrows earlier in the session to a +3% heart pounding, end of day rally.

I couldn’t help yelling at the TV screen once again simply amazed at the dissonance between what Chairman Powell was saying versus the ever-growing rally. So here are some of the notes that I wrote while they were happening along with some deeper thoughts I added after coming down from the ceiling.

“DUH!”

That is my gut level reaction to the pace of smaller rate increases in the future. This was widely known and previously signaled. Should not have moved the market 1 tick.

The pace of rate changes has nothing to do with the much more important terminal rate (highest rate) which most everyone agrees is 5% or more. And then we need to consider how long they stay at that level. And how much damage is done to the economy whilst it is in place. And how that slashes the corporate earnings outlook and stock prices by extension.

Steve Liesman of CNBC is also scratching his head at the strongly positive market reaction given all the signaling beforehand. It was incredibly obvious the Fed was going to slow the pace of rate increases yet still get to at least 5% rate which is most certainly restrictive on the economy.

The “immaculate disinflation” concept got some good laughs on air. That somehow Powell thinks it is possible to bring down inflation without serious harm to labor markets.

This has never happened before. Repeat…NEVER happened before. And to think it will happen this time around is borderline absurd.

Rick Santelli came in to say that traders are clearly NOT listening to what Powell is saying. His assessment is that traders somehow think he is bluffing about the long term nature of these rate hikes. That seems like a very dangerous bet as Fed Chairman are not typically the bluffing types.

Back to inflation, Powell said that despite some positive signs in some areas of inflation, things like sticky wage inflation says we still have a long way to go. Meaning the Fed will stay the course til the job is done…which, once again, is a long way from here. Like end of 2023.

This is kind of like the Jackson Hole speech in August where he just kept repeating the concept of long term battle over and over again. Truly there is little difference between that speech and this one in content. The major difference is in price action where the Jackson Hole speech sparked an -18% sell off in the weeks to follow. Whereas Wednesday’s speech oddly elicited a +3% rally in a matter of hours.

Here is an interesting tidbit that traders clearly didn’t appreciate. Powell agreed that Fed insiders have talked about recession being equally as likely to soft landing. And that view of things has not changed.

This may have caused a momentary pause in the bullish elation. But when you are already drunk with irrational exuberance…why stop the fun there.

Let’s pull back to the big picture…

It’s like everyone is ONLY looking at inflation and interest rates and completely blind to everything else. Like how bad the economy will become as interest rates stay elevated for a long, long time.

Please consider that for the majority of stock market history, the future outlook for the economy was the main signal of whether to be bullish or bearish. That is why there are so many economic reports covering things like manufacturing, services, employment, retail sales, industrial production, consumer sentiment etc, etc.

On that economic front, it was odd to see the stock market unmoved Wednesday by the truly horrifying Chicago PMI report which many see as the leading indicator of what will show up in the national ISM Manufacturing report. That came in at 37.2 versus 45.2 the previous month. Please remember that any reading under 50 = contraction. Therefore 37.2 is in the “holy s#*t” category.

Yes, not even close. Even more horrifying is the sudden dramatic drop in the forward looking New Orders component from -8.5 to -30.7. Meaning the ugliness should continue in the future. That probably shows up in Thursday’s ISM Manufacturing report.

Let’s not forget the weakness finally showing up in employment. ADP showed only 127,000 jobs added in November versus 239,000 the previous month.

What folks need to remember is that this lagging indicator is a slow moving train that goes in stages from great to good to fair to poor to horrendous. This may be the next turning of the screw from good to fair.

The problem is that once that train starts rolling negative it is hard to control. Not even the Fed can keep that good of a handle on employment. Meaning this key indicator of economic health is like on the verge of getting much worse in early 2023 which correlates with most peoples expectations of a recession on the way to start the year.

Reity, you make a convincing fundamental argument as always. However, is it possible that the market is right given historical evidence of how well they prognosticate things in advance…and thus it is finally time to shed the bear suit and get more bullish?

Yes, that is possible. But still not the most likely outcome.

Once more investors look beyond inflation and Fed rates…they will see that the economic rug has been pulled out. The normal trigger for bearish activity. Once the focus properly returns there it will be hard to keep hitting the buy button to push prices higher.

WHEN that happens is the greater mystery. And indeed “the market can stay irrational a lot longer than you can stay solvent.” (famous quote from John Maynard Keynes).

So we do need to keep an eye on price action in the meantime with the 200 day moving average being of most pressing concern.

Note that for a recent media interview I was asked the following question: If you could only use one indicator for the rest of your life, what would it be?

To which I answered…

“As a primarily fundamental investor I can’t believe I am saying this…but if I could only use 1 indicator for investing it would have to be something that is really good at telling if market is bullish/bearish. And that would have to be the 200 day moving average for the S&P 500 which most people agree is the best long term trend line. 

If above, then easy to be bullish focusing on the best stocks according to the POWR Ratings. And if under, then best to expect further downside leading to more conservative investing approach including inverse ETFs to profit on the way down.”

The biggest trick with this statement is what does it truly take to break above and stay above.

As you can see from the S&P 500 year to date chart there have been a few times we broke back above the 200 day only for it to fail. Thus, hard to appreciate why right now would be different with the economy on the verge of recession.

Then you have the idea that there could easily be a FOMO rally to close out the week followed by a hangover and pullback next week as investors wise up to the reality of the situation. Thus, I will find it hard to join any rally that does not extend into next week as this action may be the last gas of a sucker’s rally before the next leg lower. Again, see the chart above and appreciate how often this has happened earlier this year…and could easily be the case this time around as well.

Putting it altogether the fundamental investor in me still strongly foresees a recession and deepening bear market evolving in early 2023. On the other hand, the trader in me hates to be on the wrong side of the 200 day moving average and will not fight that tide for long.

Thus, we are at a critical juncture where I will likely sit on my hands to Monday at the earliest…maybe longer.

Please remember that the main goal of my commentary is NOT for you to agree with me. Sure that is a plus. But really I just want you to be 110% clear on my market outlook and why it leads to the steps taken in my recommendation services; Reitmeister Total Return and POWR Value.

If you agree, then feel free to follow my trading plan.

If you disagree, then do what makes sense to you.

Just remember my advice from August when the market had an ill fated 18% bear market rally above 4,300 before crumbling back down to reality:

“What is worse than being short during a bear market rally is switching to bullish right at the end and doubling down on your misery as the market heads lower once again. (Please read this section once more so it sinks in).”

What To Do Next?

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And now is a great time to load back as we deal with yet another bear market rally before stocks hit even lower lows in the weeks and months ahead.

If you have been successful navigating the investment waters in 2022, 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 updated “Bear Market Game Plan” that includes specifics on the 9 unique positions in my timely and profitable portfolio.

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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

SPY shares . Year-to-date, SPY has declined -13.17%, 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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