The bear market was reaffirmed in September as the market retested June lows and then found lower lows, says Steve Reitmeister by Reitmeister Total Return.
Next thing you know, October kicks off with a two-day “tear your face” rally that only has investors scratching their heads once again on the main question…
You could see that early October bounce coming from a mile away. Shares have fallen for six consecutive weeks, closing a drop of nearly 16% in the S&P500 (SPY) from the end of the mid-August sucker rally to Friday lows.
This made the market oversold in the short term, giving active traders the opportunity to come in and have fun playing a quick bounce. However, until we see the true depth of the economic pain ahead as the Fed works to control inflation by proactively raising rates to slow the economy, it is hard to believe that we found the bottom.
We may have had a little taste of what lies ahead on Monday with the release of the ISM Manufacturing report which fell from 52.8 to a post-Covid low of 50.9. It’s barely in expansion territory. And as you can clearly see from the chart below, the trend is not favorable.
Worse still, the forward-looking component of new orders slipped into contractionary territory at 47.1. This portends even weaker economic activity in the manufacturing sector in the months ahead.
Remember that manufacturing is often called “the canary in the coal mine of the economy” because it often shows its weakness before it devastates the service sector as a whole. (Note that ISM Services is releasing this Wednesday).
One more thing to point out in this bad report… the employment index fell from 54.2 to 48.7. This is one of the first signs of weakness in the job market which has been surprisingly robust even after two consecutive quarters of negative GDP growth.
It will be interesting to see if any of this employment weakness shows up in Wednesday’s ADP jobs report or Friday’s government jobs report. Remember that the Fed said its actions to raise rates will be ultimately lead to a weakening of the labor market. Just a matter of when it starts showing up in those monthly reports.
Again, here’s the note I shared this Friday with members of POWR Value on what may happen with the government’s monthly jobs report:
“Strangely, this report could be negative no matter what. If it’s too strong, then much like the jobless claims last Thursday, it could spook investors that the Fed will be too aggressive with rate hikes. On the other hand, if it starts to show weakness, it increases the risks of recession and with that further decline the bear market.
Now let’s turn our attention to another potential catalyst for the broader market in the coming weeks. I am referring to the October earnings season which kicks off in the middle of the month.
The early view of companies declaring early is downright horrifying. This includes a terrible performance for FedEx, which is a pretty good indicator of international trade.
This may finally be the quarter where Wall Street gets the wake-up call that leads to massive cuts in the earnings outlook. And yes, that should naturally lead to lower stock prices, because earnings prospects and price are so intertwined.
Here’s what my friend Nick Raich from EarningsScout.com had to say about earnings this morning:
- Sixteen S&P 500 companies announced the end of their August quarter.
- Their EPS estimate changes next quarter (i.e. Q4 2022) are the worst we have measured since the economy shut down for Covid in 2020.
- Steep cuts at CarMax, FedEx, Micron and Nike are the main culprits for negative reviews.
- Additionally, five of the sixteen reporting companies saw their stock prices fall by more than -20% after the earnings release.
- Early reporters’ EPS estimate revision trends reinforce our forecast that the worst of the S&P 500 EPS estimate cuts is not yet complete.
- Keep underweight stocks until we can determine when the worst cuts will occur.
Finally, back to the topic of price action. Yes, it was time to rebound even though few believe the bear market is over. So now the question is how much could we bounce back before we start testing the lows again.
Here are some of the key resistance points above us right now that could stop this rebound:
3,855 = bear market boundary line (20% below the all-time high of 4,818)
3,961 = 100-day moving average
4,002 = 50-day moving average + major psychological resistance at 4,000
4,203 = 200 day moving average
The moving averages continue to change daily and therefore the eventual test of these levels will be at slightly different prices than those shown above. However, I don’t believe we need to take another test of conviction like in August when we hit the 200-day moving average before the bears kicked in again.
I have a feeling that 4,000 will probably be the lid on this move…if not lower.
Yes, some will want to trade these short-term ripples in the market, but I think that’s often a “race of the dupe”. This means that when the main trend is down, all rallies live on borrowed time, because just about anything can happen to tip the mood down.
This means that we will stay with our current portfolio strategy which is designed to allow us to explore lower lows. With probably a bottom between 3000 and 3200.
So let the bulls have fun for a few days. We know why the fundamentals point to a bear market. And given the history, how far we’re likely to go. So we can be patient for it to happen in due time.
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