Bears Back in Charge... What Happens Next?

A month ago, the bulls claimed victory by creating a charge of over 4,000 for the S&P 500 (SPY). Since then, this false narrative has been peeled away and investors are looking more honestly at the bleak outlook formed by high inflation and a hawkish Fed. This explains why we are retesting the June lows again. Now we need to think about what comes next and how to trade our way to profits. Read below for the full story.

shutterstock.com - StockNews

I can count on one hand the number of times a bear market hasn't retested the bottom before the next bull market emerges.< /p>

Scratch that.

It only takes one finger to count...and that was the oddity of the Covid bear market that rebounded fiercely from the bottom in March 2020 never to return.

This is one of the main reasons I knew the 18% sucker rally from mid-June to mid-August was a mirage. The real problems of high inflation and a hawkish Fed were not yet resolved. This therefore indicated a future meeting where we would come back to these June lows...if not lower.

Now that we're back near those lows...what happens next?

This will be the focus of this week's commentary below...

Market Commentary

flirted with support at 3,855 on the S&P 500 (SPY) for a few sessions. This was an interesting support point as it represents a 20% decline from all-time highs, indicating a bear market.

But then the Fed brought down the hammer on Wednesday with another 75 basis point rate hike and language that says expect a lot more to come. Perhaps the worst thing they said was the strength of the jobs picture, which gives them the green light to continue aggressively raising rates assuming it will cause less pain.

However, investors correctly read that the Fed will most likely inflict more pain. And that over time, employment will get worse. Couple that with a poor start to the third quarter earnings season and investors are in a rush to get back into bearish territory below 3,855.

The next serious point of support is to retest the June lows at 3,636. It's shocking how quickly we got there as investors seemed pretty eager to approach those levels on Friday with a bottom of 3,647 before a rebound of 50 points at the close.

As I said even back in August with the market at 4,300, it's odd, bordering on insane, that a bear market doesn't retest the lows. Just a matter of time before that happens.

Some scoffed at this comment as if I couldn't see the new bull market forming before my eyes. However, I don't believe in price action as much as I do in fundamentals. And the fundamentals say that...

High inflation + Fed hawkish = Recession and bear market ahead

Those looking for cracks in the economy may have already noticed that we endured 2 straight quarters of negative GDP growth to start the year. However, the third quarter looked pretty solid with the Atlanta Fed's famous GDP Now model showing a potential reading of +2.6% for the current quarter. This is undoubtedly one of the reasons for the great rebound that occurred from mid-June to mid-August.

However, since the beginning of the month, the growth outlook has been cut to the downside after almost every economic report. And this week, after housing starts, the GDP estimate was further reduced to just +0.3%.

The only reason there is currently no talk of a recession is that there is no increase in unemployment. It is at this level of economic suffering that the National Bureau of Economic Research, the official arbiters of recessions, would ring the bell.

Now, let's remember what the Fed said loud and clear. They must crush inflation. This can only be done with a long-term battle to raise rates above normal levels, which will lead to below-trend growth and lead to weaker labor markets.

Remember that the Fed has an optimistic bias. So if they say these negative things are going to happen... then you better believe it's true. And unfortunately, it will probably be even more painful than the sweet picture they paint.

This is what investors woke up to and explains why the market is back in bearish territory below 3855.

And why we are so quickly retesting the June lows at 3,636.

And that's why I'm pointing out that the average bear market decline is 34%, which would equal 3180.

And that's why you should expect more downside from current levels.

Yes, there will be...