It is not unusual for the new year to start bullish. Just a fresh dose of optimism comes with flipping the calendar.
Those good vibes are over!
Now more investors are coming back around to the bearish premise that never really went away. Add in a dose of concerns about the health of the financial industry and we finally broke below the 200 day moving average with odds of much more downside on the way.
I am here to make sense of it all in this week’s market commentary below...
Market Commentary
As they say a picture is worth a thousand words. So, let’s start with the picture of the S&P 500 (SPY) this past year including the long term trend line better known as the 200 day moving average (in red).
You can see how vital the 200 day moving average has been in framing the action this past year. First being the bearish break below in April 2022 with many subsequent suckers’ rallies that failed as they approached this key level.
However, the bulls really tried to make a convincing run of things by finally breaking above in January and staying above for nearly two months. That party ended yesterday with the first close below the 200 day (3,941). And today was a convincing follow through session to the downside.
Now the bears are firmly in charge once again. Let’s discuss why...
On Tuesday of this week Fed Chairman Powell reminded everybody why they should reconsider their bullish ways. In essence he stated that given the facts in hand that rates will likely need to go higher than previously stated...and stay in place for longer.
This led to a -1.5% sell off on Tuesday. Just for clarity, here is the key quote from Powell so you appreciate that there is little room for misinterpretation.
"The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."
This reminds folks of the Feds intent to lower demand...which is a fancy way of saying likely to create a recession as a necessary evil to tamp down the flames of inflation. Hard to be bullish when the Sheriff of the economy is putting up a roadblock to economic advance.
When you have this clear message already in hand, then it becomes unnecessary to wait all the way for the Fed meeting on 3/22 to start selling. This notion was taken to the next level on Thursday with the first break below the 200 day moving average in quite some time.
Most of the investment media outlets stated that the reason for this downward pressure is that more people were getting spooked about the likelihood of employment report being too strong on Friday which would be a cherry on top for further Fed hawkishness.
That was a prescient move as indeed we found out Friday at that US economy added 311,000 jobs in February about 50% higher than expectations. Interestingly, the month over month wage increase was a notch lower than expected at +0.2%.
However, that is a very volatile indicator month over month. What really matters is that with the unemployment rate at record lows...and this many jobs still being added...and with more than 10 million job openings still being published...then it is a pretty good indicator of wage inflation likely being far too high in the future. This news had stocks bolting lower once again on Friday reconfirming the break below the 200 day moving average.
Note we have made it this far and I have not yet brought up the Silicon Valley Bank situation. No doubt about it...this event is also part of the recent sell off as investors are haunted by “Ghosts of Financial Crisis Past”.
My early take is that this is an isolated incident and not a statement of systemic financial crisis as we endured in 2008. However, there is likely more juice to squeeze from this story as investors will likely demand some kind of stress testing of banks to insure confidence. That is not a quick fix solution and will likely only add to downside pressure in coming weeks.
Looking ahead there are more fireworks set to go off in coming weeks such as:
3/14 Consumer Price Index (CPI). The key being the month over month pace to see if we are heating up like the February report...or cooling down like the previous few months.
3/15 Producer Price Index (PPI). Insiders know that this is more important than CPI because the prices paid by producers today ends up in the final product and services in the months ahead. (Current PPI leads to future CPI).
3/22 Fed Meeting with Interest Rate Decision & Economic Projections. Last month was only a 25 basis point hike. However, the odds makers are now leaning to 50 points this time around given Fed statements of needing to go even higher for longer.
I suspect these events will only reconfirm the logic behind the recent break back below the 200 day moving average.
The next battle ground is 3,855 which is the official border of bear market territory representing a 20% drop from the all time high (4,818). The Friday close of 3,861 means we are already knocking on the door.
Just for good measure lets talk about the possibility of what lies below.
3,491 is the low made in October and likely to be retested.
3,180 would mark a 34% decline from the all time high which is the average decline during a bear market.
3,000 is a point of serious, serious psychological resistance and hard to imagine going below unless some currently unforeseen crisis develops.
Putting it altogether, the bear market never left the scene. It just faded to the background for a while as bulls had some fun in January and early February.
That party is over!
The next thing to do is appreciate the sound logic behind the bearish argument and how much downside is likely still on the way. That should compel you to enact strategies that are suited for a bear market environment. The next section will help you with that...
What To Do Next?
Discover my brand new “Stock Trading Plan for 2023” covering:
- Why 2023 is a “Jekyll & Hyde” year for stocks
- How the Bear Market Comes Back with a Vengeance
- 9 Trades to Profit Now as Bear Returns
- 2 Trades with 100%+ Upside Potential When New Bull Emerges
- And Much More!
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 . Year-to-date, SPY has gained 0.91%, 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.
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