The fallacy of the bullish argument

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40-year investment veteran Steve Reitmeister doesn’t buy the bullish argument that is gaining momentum as the S&P 500 (SPY) closes above 4,200. In fact, he says he is poised for a serious correction and therefore Therefore, he warns investors not to get CAUGHT into this rally, as the rug is about to be pulled. He finds out why along with a timely trading plan in the new comment below.

Friday’s headlines boast that stocks have hit new highs since the bear market began a year ago. This is generating a new round of optimism that the new bull market is soon at hand.

Yes, technically speaking, stocks are up more than 20% in the S&P 500 from the October lows. But digging below the surface paints a far less bullish picture that makes this feel like yet another in a long line of rallies from fools before stocks drop again.

Full details on why that is the case along with the trading plan to follow in this week’s market commentary.

market commentary

Let’s start with the headline statements.

That being with the S&P 500 (TO SPY) closing at 4,205 today, is up just over 20% from October lows of 3,491.

Second, the S&P 500 is up +9.5% in 2023 alone and hit new highs today.

Both are very bullish statements and will cause some bears to consider throwing in the towel. But before you do, consider the following chart that compares the equally balanced version of the S&P 500 (RSP) against the index that is dominated by tech mega-caps:

Yes, that -0.4% loss for the equally weighted version of the S&P 500 offers a stark contrast to the bullish version of the market that some are trying to sell us.

Now let’s share some corresponding data from FinViz as we break down the year-to-date results by market capitalization:

There we see that the S&P 500 gain of 9.5% on the year is a complete fallacy, as it is ONLY accumulating for the few mega-caps that have shot up 23%.

These moves were only amplified this week, as NVDA had that stellar pace on Wednesday night, filling the mega-caps once again through Friday’s close.

What does it really mean?

That investors are really in Risk Off mode. That they only feel safe investing in a small group of the best long-term holdings like FAANG and some of their closest friends. Very few other groups are feeling the love…and therefore it’s hard to say this feels like the start of a new bull market.

Remember that new bull markets are triggered by BROAD-BASED stock buying and smaller, faster-growing stocks lead the way. This is because those same stocks were hit the hardest, allowing for dramatic rebounds from oversold funds.

THAT’S NOT HAPPENING NOW!

And therefore there’s just no way for me to be optimistic. Especially since the recent round of enthusiasm focused on the resolution of the debt ceiling agreement that I spoke about earlier in the week as a sideshow distraction.

It looks like there are only 2 options from here:

First, the bull market is real, leading to a widening of the groups of stocks that are moving higher. Especially the small caps which, again, are flat on the year.

For this to happen, the bears would have to throw in the towel. This is going to be hard to do right now with the Federal Reserve committed to higher rates through the end of the year, where they even admit they expect a recession to happen before inflation is finally under control.

A real turnaround from the Fed to start cutting rates is the likely catalyst for bears to jump on the bull bandwagon. Those who think that will happen at the next meeting on June 14.^he they are hitting the meth pipeline too hard given a series of recent statements by various Federal Reserve officials that they have MORE WORK TO DO.

Also emboldening the Fed’s view was a higher-than-expected PCE price index report on Friday. Since the Fed is “data dependent”, this sign that inflation is still too high will only further encourage them to keep rates high through the end of the year.

The second, and most likely, outcome at this stage is that we are preparing for a serious correction. This is where this mega-cap mirage of a rally runs out of steam, allowing investors’ real risk concerns to shift to a broad-based retreat for the broader market.

And yes, this selloff could spill over into a return of the bear market… but for that to happen, we need to see stronger evidence that a recession is all but a certainty waking the bear out of its recent slumber.

The reason for recession PROOF is that investors are tired of hearing about the “possibility” of a recession. That’s kind of like the Boy Who Cried Wolf at this stage. Investors will need to see blood dripping from those fangs to believe that the recession really is here and therefore it is time to sell stocks in earnest.

For me, this is still the most likely outcome. I explained it in full in this recent article: Why Steve Reitmeister is turning more bearish.

The quicker version is to remind people that 12 of the last 15 times the Fed raised rates created a recession…not a soft landing as intended.

This time, the Fed is enacting the most aggressive rate-hike regime in history. And they admit that a recession is the likely outcome to end inflation.

So if the Fed is predicting this outcome…and it usually turns out worse than expected…and they have their hands on the wheel…then the most likely outcome is a recession and deeper bear market.

That possible correction will likely begin once the Debt Ceiling deal has been closed and investors look around for nothing else to cheer about. Or maybe it’s just after the June 14 rate hike announcement that Powell has to remind investors ONCE AGAIN that his job is far from done… and rates won’t go down until 2024. And yes, they are still predicting a recession. before it’s all done.

Again, I think this is the most likely outcome. But it is still possible that the recession never hits and a real bull market emerges. The environment for that is simply not at hand… and so he warns people not to get sucked into the fool’s rally that’s going on right now.

How should you invest right now?

More on that in the section below…

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 up $0.53 (+0.13%) in after-close trading on Friday. So far this year, SPY has gained 10.25%, 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 The fallacy of the bullish argument first appeared in stocknews.com