Investors: DO NOT be fooled by this rally of fools

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The S&P 500 (SPY) appears to be breaking into bullish territory above 4200. However, history shows plenty of examples of how this could be nothing more than a Suckers Rally. That’s why you should tune in for Steve Reitmeister’s latest market commentary, which includes a clear trading plan and the best options for this unique market environment. Get the full story below.

Stocks rose last week on news that a debt ceiling showdown is likely to be avoided. To that I say a big, friendly…

DUH!

That’s because politicians never leave their finger in this socket for long. It is always magically resolved at the last moment.

As the smoke from this rally cleared, investors realized that they did not have the determination to truly enter bullish territory above 4,200 for the S&P 500 (TO SPY). This likely means more limbo and range trading is ahead as investors wait for a REAL catalyst to settle the bull/bear debate once and for all.

Let’s review why this is the case…and what potential catalysts are on the calendar that could produce the next big move for the stock market.

market commentary

The short version of my current market outlook was nicely summed up as follows in my comment above:

“There has been a tug-of-war all year between bulls and bears. It would appear that the bulls got the upper hand early on given that stocks soared near 4,200 in early February…but since then stocks have traded in a narrow range where bulls and bears seem fairly balanced.

The bears will say that storm clouds are still gathering for a recession and a deeper bear market thanks to a hawkish Fed determined to create a recession to end high inflation.

The bulls will say that the long feared recession is NOT still happening. And maybe it never will. Therefore, the lows are already in and the new long-term bull market has already begun.

Right now, these 2 opposing views are fairly even, creating a tight trading range and a sizeable drop in volatility. That sleepy action will end when either the bulls or the bears can wave the victory flag. Until then… the limited action of the sleepy range will continue.”

(Read the full version of the previous comment here: The WORST stock market of all time – Part 2)

Even though the shares rose this week as high as 4,200. Truly nothing has changed to convincingly win the bull/bear battle. In fact, most of the recent substantive news has been negative.

Like retail sales, which came in at just +1.6% year-over-year. When you remove +4.9% CPI inflation, it shows a drop of -3.3% for US retail.

This fits with the general high-inflation narrative that consumers are afraid to wait to buy products, leading to an apparent boom in GDP in the short term. This is followed by an economic cliff as demand has increased. In fact, that recession precursor may be happening now.

Those looking to the Fed for signs of a turn to lower rates should be disappointed by what they heard this week.

First it was Dallas Fed President Logan who said current data does not justify pausing rate hikes yet. Then on Friday morning, Chairman Powell was giving a speech reemphasizing that inflation is still too high and that the Fed would stick “firm” on its price-lowering objective.

This means that bulls should be disappointed once again to hear the aggressive determination that the Fed is likely to reiterate in the next announcement on June 14.^he. But even that isn’t enough to win the day for the bears either.

Investors will need to see clear evidence of a recession on the way for the bear market to reemerge. This would cause shares to break below the 200-day moving average at 3,976 and likely retest the October lows of 3,491…if not lower. (That break below 3976 should be your trigger to turn more bearish.)

This got us back in”catalyst watch” for any event that ends this bull/bear matchup convincingly. Here is the list of the key events on the calendar that could serve as a catalyst:

5/25 Unemployment Claims– This will not be strong enough on its own, as investors would seek input from the 6/2 Government Employment Outlook report. However, if jobless claims start to approach 300,000 per week, historically that indicates that the unemployment rate is poised to rise for quite some time.

5/31 Employment ADP, JOLT– 2 other jobs reports that often serve as leading indicators of what’s to come with the monthly Government Employment Outlook.

6/1 ISM Manufacturing, Unemployment Claims- there have been a LOT of weak readings for ISM Manufacturing without really signaling that a recession was on the way. However, this remains one of the key monthly reports to monitor the health of the economy.

6/2 Government employment situation- Job additions are expected to continue to decline to 180,000 this month. Keep in mind that population growth requires 150,000 jobs per month to keep the unemployment rate level. Therefore, any move below that mark could cause investors to forecast even worse readings ahead. Also, many eyes will be on the wage inflation component, as that sticky inflation has clearly been annoying for the Federal Reserve.

6/5 ISM Services- Has been in positive territory at 53.4 in the past month. But if that falls below 50 into contraction territory, it would definitely increase the odds of a recession down the road.

Fed meeting on June 14: more investors expect them to stop raising rates. But that’s quite different than moving to lower rates which they claim is a 2024 event. So Powell’s press conference following the rate hike decision will be closely watched for clues of what comes next.

In general, I still believe that we should take the Fed at face value that a recession will occur before inflation is properly controlled. And once Pandora’s Box is opened… then things can turn ugly quickly with much lower stock prices on the way. This is why I am not tempted to join the bulls even when they are knocking on the door with a potential break above 4200.

Reity, are you saying that it’s not possible to exceed 4200 now?

I’m not saying that because with the stock market anything is possible.

However, looking back in history, there have been many false starts of a new bull market that then failed…and failed miserably.

Most notable is the over 20% rally from November 2008 to early January 2009 that technically marked a new bull market. This drew many excited investors only for the bear market to come back strong with lower lows en route (focus on the arrows on the chart below).

Therefore, breaking above 4200 for a while without a clear fundamental catalyst would not prompt me to look for stocks due to the high probability that it is a “fools rally“.

Yes, at some point the next bull market will make a lot of sense. Right now, the high probability of a looming recession, leading to lower corporate profits and lower stock prices, is simply not the case (the market has always worked this way…and I suspect it always will).

So continue to balance your portfolio, which means about 50% long stocks. Then, when the CLEAR bullish or bearish catalyst emerges, make the rest of your moves to join that bandwagon.

What to do next?

Discover my balanced portfolio approach for uncertain times. The same approach that has beaten the S&P 500 by a wide margin in recent months.

This strategy was built on the foundation of more than 40 years of investment experience to appreciate the unique nature of today’s market environment.

Right now, it is neither bullish nor bearish. Rather he is confused and uncertain.

However, given the facts available, we will most likely see the bear market come out of hibernation by attacking stocks to the downside once again.

We can gladly enact strategies to not only survive that recession… but even thrive. That’s because, with 40 years of investing experience, this isn’t the first time I’ve been involved in the bear market roundup.

If you’re curious to learn more and want to see the handpicked trades in my portfolio, click the link below to get started on the right hand side of the stock:

Steve Reitmeister’s Trading Plan & Top Picks >

I wish you a world of success in your investments!

steve reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Publisher, Reitmeister Total Return

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SPY shares were down $0.64 (-0.15%) in after-close trading on Friday. So far this year, SPY has gained 9.88%, versus a percentage increase in the benchmark S&P 500 index over the same period.

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About the author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. He is not only the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return Wallet. Learn more about Reity’s background, along with links to his most recent articles and stock picks.

Further…

The charge Investors: DO NOT be fooled by this rally of fools first appeared in stocknews.com