STOP! Don’t Trade the Key Event on June 14 Without Reading This Investor Alert First!

Are you impressed by the recent rally in the S&P 500 (SPY)? Steve Reitmeister points out why this may be another fools rally before the next leg down. This is especially true as we approach the next Fed meeting on Wednesday 6/14. Get Steve’s updated market outlook, business plan, and top picks below.

The breakdown of stocks from last week is now consolidating just below 4,292 for the S&P 500 (TO SPY)…the level that designates a new bull market. This is leading to some serious sector rotation that can often be quite confusing as you delve into the details.

So it’s best to step back for the big picture, which is exactly what we’ll do in this week’s Reitmeister Total Return commentary.

market commentary

First, let’s clarify why 4292 is such an important level for stocks. This is because the official definition of a new bull market is for the S&P 500 to close 20% above the lowest closing price.

As we go back to October 12^he we found that the bottom was 3,577.03. Now add 20% to that, which equates to the stock having to close above 4,292.44 for it to technically be called a new bull market.

On Tuesday we ended at 4,283.85. Close… but no cigar.

What has emerged this week is a period of consolidation for the S&P just below this key level. However, under the surface there is a DRAMATIC rotation of sectors.

For example, on Monday small caps hit the nail on the head after a sharp top chop to the chin. Then on Tuesday they actually outperformed large caps by 10 times (not a typo).

What does it mean? Absolutely nothing!

Consolidation periods are best viewed as “Wait and see“period where investors are not ready to move higher…and not ready to really pull back either. This makes the overall market average barely move on a daily basis. However, across sectors and market capitalization groups there can be large discrepancies between winners and losers.

The reason this type of action means nothing is that if you try to chase sector turnover in search of trading gains, you will almost always miss the action… like a dog biting its tail. Just tired and confused.

The best use of time for investors is to determine what happens AFTER the consolidation period ends. As in, will we break higher confirming the new bull market or are we ready for a serious correction?

There are 2 keys to predicting that outcome. First, what will the Fed do at its next meeting on 6/14. Second, what are the chances of a recession forming that will reawaken bearish sentiment?

Let’s start with a discussion about the next Fed meeting on Wednesday, June 14.^he. Right now, investors see a 78% chance of no rate hike, which is in line with many of the recent official Fed statements.

Before you applaud this as the much-anticipated shift to more accommodative policy, you should appreciate that investors actually expect a 51% chance of a 25-point rise at the July meeting. And another 11% expect it to be an increase of more than 50 points.

Plain and simple, the Fed has been consistent in saying that there is more work to be done to bring inflation down to the 2% target. And therefore you shouldn’t expect lower rates until 2024 with the goal of reducing demand (aka slowing down the economy to slow down prices).

Please don’t forget that at the May meeting, Powell still stated that his base case pointed to a recession on the way before they finished their work. I don’t think his tone will change at the June meeting, which will likely throw cold water on the bulls yet again on the 6/14 announcement.

Now let’s move on to the second issue that will weigh heavily on the market outlook. That is if a recession is on the cards waking the bear from its recent hibernation.

Just go back two paragraphs to appreciate that the Federal Reserve expects a recession before all is said and done with its rate-hike regime. Next, consider this recession prediction I wrote down last week from famous Swiss money manager Felix Zulauf:

“We only know in hindsight when the recession started, but there is an indicator that you can look at that gives you some indication of when the recession is here, without knowing for sure. And that’s when the inverted yield curve starts to flatten.

“And in fact, in the last few days or two weeks, we’ve seen some flattening of that yield curve, and this could be an indication that we’re very close to the start of a recession.”

And here’s a cross-plot showing the 2-year vs. 10-year rate inversion over time and its relationship to recessions (grey bars):

In fact, you can see that recessionary periods did not occur at the deepest times for yield curve inversion. Instead, it took place after it flattens out and often begins to improve.

Now take that into consideration as you look at the far right of the chart where the most recent reversal has started to flatten out. And correlate that with the expected 10% drop in corporate profits in the second quarter. And now correlate that with the Fed’s expectations of a recession building up by the end of the year before they start lowering rates.

Third, consider the recent deterioration in some of the most closely watched economic indicators, starting with ISM Manufacturing last Thursday. That was deeper into contraction territory at 46.9. As bad as it sounds, the forward-looking New Orders component of 42.6 says that things are likely to get worse.

But Reity, manufacturing is only 15-20% of the US economy. What are the readings of the much more significant ISM Services report?

That fell from the previous positive reading to an anemic 50.3 showing the employment component slipping into contraction territory at 49.2. This means that service providers are increasingly concerned about future growth prospects, leading them to scale back their recruitment plans.

If price action was your only guide, then yes, there is some reason for excitement as we are on the brink of a breakout into bull market territory. However, when you appreciate the fundamentals, such as the focus on the Federal Reserve’s action and the current state of the economy, then it becomes more difficult to expect more upside at this point.

I suspect that the consolidation period just below 4,292 will extend until the Fed announcement on 6/14. So please don’t get sucked into all the sector rotation nonsense until then. It is better to prepare for what comes next.

On that front, I predict stocks will fall seriously from the afternoon of 6/14 as investors recall the committee’s vigilant plans to squash inflation once and for all (which will probably squash the economy).

As they say”Don’t fight the Federal Reserve”.

So, if they’re telling you outright that we’re likely to have a recession before it’s all said and done, then it’s best to take them at their word. Which means the stock is more likely to go lower from here…and probably much lower.

What to do next?

Discover my balanced portfolio approach for uncertain times.

This helps you participate in the current market environment while adjusting more bullish or bearish as needed.

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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Shares of SPY were up $0.24 (+0.06%) in after-close trading on Tuesday. Year-to-date, SPY has gained 12.35%, 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 Investor Alert: How to Trade the Key Event 6/14? first appeared in stocknews.com