40-year investment veteran Steve Reitmeister doesn’t believe the bullish argument, gaining momentum as the S&P 500 (SPY) closes above 4,200. In fact, he sees the conditions for a serious correction and therefore cautions investors not to get caught up in this rally as the bottom will soon be ripped out. Find out why in the actual comment below and learn an actual trading plan.
Friday’s headlines boasted that stocks have made new highs since the bear market began a year ago. This inspires renewed optimism that the new bull market is imminent.
Yes, technically, shares are up over 20% against the S&P 500 since the October lows. Beneath the surface, however, the picture is far less optimistic, making it feel like another in a long line of weak rallies before stocks tumble again.
See this week’s Market Commentary for full details on this, as well as the trading schedule.
Let’s start with the main statements.
This applies to the S&P 500 (SPY) closed at 4,205 today, up just over 20% from the October low of 3,491.
Second, the S&P 500 is up +9.5% in 2023 alone and has hit new highs today.
These are both very bullish statements and will cause some bears to consider throwing in the towel. But before you do that, please consider the chart below, which compares the equally balanced version of the S&P 500 (RSP) to the index dominated by tech mega-caps:
Yes, this -0.4% loss for the equally weighted version of the S&P 500 represents a stark contrast to the bullish version of the market that some are trying to sell us.
Now, let’s share some related facts from FinViz as we break down year-to-date results by market cap:
In it we see that the S&P 500’s 9.5% year-over-year gain is a total fallacy as it relates ONLY to the few mega-caps that are up 23%.
Those moves were only amplified this week as NVDA pulled off a stellar hit on Wednesday night, giving the mega caps another boost into Friday’s close.
What does it REALLY mean?
That investors are indeed in risk-off mode. That they only feel safe with a small group of the best long-term holdings like FAANG and a few of their closest friends. Very few other groups are feeling the love… so it’s hard to say this is the start of a new bull market.
Keep in mind that new bull markets are created by buying stocks broadly, with smaller, higher-growth stocks taking the lead. That’s because those same stocks suffered the most, leading to dramatic rallies from oversold lows.
THIS WILL NOT HAPPEN NOW!
And so there’s just no way for me to be optimistic. Especially since the latest wave of enthusiasm has been about resolving the debt ceiling agreement I spoke about earlier in the week side distraction.
It feels like there are only two options from here:
First, the bull market is real, leading to an extension of stock groups that are trending up. Most notably small caps, which were also flat year-over-year.
For that to happen, the bears would have to throw in the towel. This may be difficult at the moment as the Fed has committed to higher interest rates by the end of the year and even admits it expects a recession to hit before inflation is finally brought under control.
A real change of course by the Fed to cut rates should be the trigger for the bears to jump on the bullish bandwagon. Those who think this will happen at the upcoming June 14 sessionth With recent statements from several Fed officials that they have more work to do, they’re hitting the meth pipe a little too hard.
Also encouraging for the Fed’s assessment was a higher-than-expected PCE price index report on Friday. As the Fed is “data dependent”, this sign of inflation still being too high will only give them more encouragement to keep rates high through year-end.
The second and more likely outcome of this phase is that we are bracing for a serious correction. This is where the mirage of a mega-cap rally emerges, with momentum running out and genuine investor risk aversion leading to a broad-based pullback for the overall market.
And yes, this sell-off could lead to a return of the bear market… but for that we need stronger evidence that a recession will almost certainly awaken the bear market from its recent slumber.
The reason for the evidence of a recession is that investors are tired of hearing about the “possibility” of a recession. It’s a bit like “The Boy Who Cried the Wolf” at this point. Investors need to see the blood dripping from those teeth to believe the recession is really here and it’s time to sell stocks in earnest.
To me, this remains the most likely outcome. I explained it in detail in this recent article: Why Steve Reitmeister is becoming more pessimistic.
The quicker version is to remind people that 12 of the last 15 Fed hikes resulted in a recession…rather than a soft landing as intended.
This time the Fed is enacting the most aggressive rate hike policy in history. And they admit that a recession is the likely outcome that will put an end to inflation.
So if the Fed is predicting that outcome…and usually worse than expected…and it’s in charge…then a recession and a deeper bear market is the most likely outcome.
This potential correction is likely to start once the debt ceiling deal is finalized and investors look around and find nothing to cheer about. Or maybe it’s right after the 6/14 Fed rate hike announcement that Powell needs to remind investors ONCE AGAIN that their work is far from done…and rates won’t go down until 2024…and yes , they’re still predicting a recession before it’s all done.
Again, I think this is the most likely outcome. But it’s still possible that a recession never materializes and a real bull market emerges. The environment for that just doesn’t exist… and that’s why we’re warning people not to get sucked into the chump rally that’s going on.
How should you invest at this time?
More on that in the next section…
What do you do next?
Discover my balanced portfolio approach for uncertain times. The same approach that has clearly outperformed the S&P 500 in recent months.
This strategy was developed using over 40 years of investment experience to recognize the uniqueness of the current market environment.
It is neither bullish nor bearish at the moment. Rather, it is confusing and uncertain.
However, given the facts at hand, we will most likely see the bear market awaken from hibernation and send stocks plummeting again.
We’d love to strategize to not only weather this downturn, but actually thrive. That’s because, with 40 years of investing experience, this isn’t my first time participating in the bear market rodeo.
If you’re curious and want to learn more and see the handpicked trades in my portfolio, please click on the link below to be taken to the real page of what’s happening:
Steve Reitmeister’s trading plan and top tips >
We wish you every success in investing!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Riding Master Total Return
SPY shares were up $0.53 (+0.13%) in after-hours trade on Friday. Year-to-date, SPY is up 10.25%, while the benchmark S&P 500 index is up % over the same period.
About the Author: Steve Reitmeister
Steve is better known to StockNews audiences as “Reity.” In addition to being the company’s CEO, he also shares his 40 years of investment experience Reitmeister Total Return Portfolio. Find out more about Reity’s background and links to his latest articles and stock picks.
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