(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).

Tuesday we once again retested the June lows of 3,636 for the S&P 500 (SPY). Even dipped under mid-session and then closed just above at 3,647.

So now that we have retested the lows and closed above…does that mean we have found the bottom of this bear market?

NO WAY!

The reasons why we will head lower and bear market trading plan is what is to follow in this week’s commentary below…

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Market Commentary

Tuesday we saw some classic stock market behavior.

That being where the market has been going down, down, down for quite some time. Next arrives a big juicy morning bounce to open the Tuesday session. Yet tick by tick it fritters away to become a loss. Even worse, we retested the June lows of 3,636 for the S&P 500 (SPY).

Note that this type of session often happens 2-3 at the tail end of a bearish run before a lasting bounce ensues. That’s because each bounce higher gives frightened investors one last chance to sell at a slightly better price.

But note I said bounce…not the beginning of a new bull market. We are far from having that conversation as we have not yet glimpsed how bad the economy will get as the Fed presses hard on the brakes.

Meaning we have to assess:

• How weak GDP becomes
• How much unemployment will spike
• How deep a cut in corporate earnings outlook
• And thus how much stock valuations need to be cut to find bottom.

Too many investors think of a bear market as an event. Like a 1 time thing. Instead, it is a process that typically takes over a year to work its way out.

Unfortunately for all of us the most recent bear market in memory was the Covid crash of March 2020 that lasted a shockingly short, yet painful, 3 weeks before bottom was found 34% down and then a new bull market ensued.

What people forget about that “one of a kind” bear market is that Treasury rates also dropped below 0.5% making stocks the ONLY investment game in town. That is what caused the bounce so early even as the world economy was quickly swirling down the toilet.

This time around we have a likely recession caused by rampant inflation that the Fed is DEAD SET on taming. This means we actually have soaring rates this time around. And thus investors need to weigh the value of stocks versus a 10 year Treasury bordering on 4%. That makes stocks much less attractive by comparison and why bottom will not be found so quickly and easily.   

Long story short, we are still in the midst of a long term bear market that has not yet found bottom. So, let’s talk about the price action from here and how that relates to our trading plan.

Gladly I did an extensive write up on that last week. I will repeat it here with some modest updates on the key S&P 500 (SPY) levels to keep the insights fresh and timely:

3,636 = the June lows. Rarely will you see any correction or bear market that ends without retesting the lows. So that is likely the next point of support as we explore the true depths of this bear market.

It may be hard for stocks to head below this without seeing some of that pain on display that the Fed talked about. Like the employment market finally showing some weakness.

So if we rush down there and pain is not on the menu yet, then this will be ample support perhaps with another juicy bounce to follow. Not an 18% insanity bounce like we say in July/August. Perhaps more like +5-10% awaiting the next economic signals.

If and when the economic pain train is on the way, then stocks will keep heading lower.

(9/27/22 Update: So here we are retesting those June lows. And as of now the pain forecasted for the economy by the Fed is not yet in plain sight.

Perhaps we do go lower now…like maybe 3,500 and then see a bounce. Or maybe one unfurls now.

Again, a smooth one stop ride to bottom is not in the cards…EVER. We will probe lower…then bounce…then be volatile…then head lower again at some unspecified time. Rinse and repeat. Rinse and repeat.

Finally at the precise moment that buying stocks sounds like the worst idea ever…THAT is bottom…and that is when you buy for the next bull market.

Now let’s get back to the rest of the price action conversation from last week that is still wonderfully relevant today).

3,373 = 30% down from the all time highs. Likely there will be some folks starting to bottom fish around here. I may do that as well. Or simply start to take profits on our inverse ETFs…but definitely not fully long at this time given the points noted below.

3,180 = 34% decline from the highs which is in line with the average decline of a bear market. Another spot to take profits on inverse ETFs and bottom fish for the eventual return of the next bull market.

3,000 = Very interesting psychological level of support. It may be hard to go lower than that unless it truly feels like a much worse than normal recession. And yes, we may never make it down here as there will be a lot of buying activity between 3,180 and 3,373. But if we did get this low, then will put more money to work in the market for return of the next bull. Maybe even back to fully invested.

I am laying this all out for 2 reasons.

First, to understand the likely downside potential and why the hedge is in place to mop up gains on the way down.

Second, to show where we may want to start taking profits on the hedge and prepare for the next bull market. I will be very tempted to maybe get back to 30-40% long in that area around 3,373.

However, given how much valuations got stretched on the way up in this bull market (thanks to ultra low bond rates making stocks so damn attractive) then indeed they may fall further than average. So if we get down to 3,180 then likely get back to 50-60% long. And if make it to 3,000 then probably 100% long as the bounce from bottom will be fast and furious.

Remember NOBODY rings a bell at the top or bottom. It will not be easy. And will be hard to do in the moment because we will be buying when everything looks terrible (economy…price action etc). But indeed, with the stock market it is always “darkest before the dawn”.

Or simply it becomes Warren Buffett time to…”be greedy when others are fearful”.

You now understand why the bias has pushed bearish once again. And yes, you also understand from the 18% July/August bear market rally that the road to bottom will not be easy. It requires patience and discipline as there are always ill-fated rallies sprinkled in.

It also requires a plan which we have; to not just profit on the way down…but to get ready to ride the next bull market.

Let’s go!

What To Do Next?

Discover my hedged portfolio with 9 simple trades to help you generate gains as the market descends further into bear market territory.

This plan has been working wonders since it went into place mid August generating a +4.65% gain as the S&P 500 tanked over 15%.

If you have been successfully 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 “Bear Market Game Plan” that includes specifics on the 9 positions in my timely and profitable hedged portfolio.

Click Here to Learn More >

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 rose $0.13 (+0.04%) in after-hours trading Tuesday. Year-to-date, SPY has declined -22.61%, 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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