Believe the Fed...More PAIN on the way for stocks

It's easy to appreciate investor confusion right now. Just when you think the bears are back in charge... Then comes a big 3-day rally that challenges everything. But why did he join? And why are most signs still pointing to a downtrend? And why does Steve Reitmeister think 3000-3200 is the most likely destination for the S&P 500 (SPY) this year? The answer to these vital questions and many more awaits you in this timely market commentary below.

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Stocks took advantage of a strong rally after Labor Day to end a 3-week bear streak. This follows good news regarding the economy.

Unfortunately, there are two ways to look at this good news. And the other way is quite negative, which is why concerns about a further bearish drop are still significant.

We'll review these recent catalysts and what they predict about future market conditions in this week's commentary.

Market Commentary

Facts first.

After several sessions below 4000, stocks rallied back above Thursday and rose again on Friday to close at 4067. This ends the three-week selloff from mid-August when the S&P 500 (SPY) broke above 4,300. Yet, we are still well above the June lows of 3,636.

See now.

I believe we are finding a new balance at these levels by balancing the bullish and bearish possibilities. That means I don't think we'll go much higher...or much lower in the near term. More than one trading range scenario is likely to emerge as investors wait for new facts that would alter the bullish/bearish odds.

You already know I'm bearish for the reasons stated over and over again in my recent comments. So I'll spare you the regurgitation of all that logic right now.

However, I want to make it clear that it is more important to me to be profitable... than to be right. Which means if any new facts emerge that are decidedly bullish... I'd love to shed my current bear coat and become a raging bull in a matter of seconds flat.

It is important that you understand this last point so that you can understand that I am not unnecessarily distorting the facts into a bearish slant. I'm just trying to share that there really is more than one way to watch the latest newsbytes.

Let's start with the fall in energy prices which hit $125 just a few months ago and are now between $80 and $80. The good news should be obvious to everyone, because energy is so central to the inflation equation. So if prices are falling so fast, then maybe the Fed doesn't need to fight so hard to get inflation under control.

Now consider the other side of the coin. Prices are NOT falling due to current supply and demand dynamics. Rather, it is energy speculators driving prices down given their worries about a future recession. And yes, recessions naturally mean lower demand, which leads to lower prices.

If these energy traders are right, that portends more trouble ahead for the wider economy. Meaning recession. And indeed, recession and continued decline in stock prices go together like peanut butter and jelly.

Now consider the still strong employment picture. I had recently discussed how the weekly jobless claims potentially showed cracks in the strong employment base, with the number of weekly claims rising steadily since March.

Well, in the last few weeks that trend has reversed, with unemployment insurance claims declining. This likely means jobs gains in the economy will be robust again for the August reading.

This points to another double-edged sword similar to what I shared with falling energy prices. On the plus side, the job market may be robust enough to handle the Fed's higher rate drugs. So if they can get inflation under control without really damaging the job market, then a soft landing will indeed have taken place, which will get the bulls into the races.

On the other hand, this healthy employment picture could encourage the Fed to raise rates more aggressively than necessary. And once the ball starts rolling on a weaker job, it usually continues to roll in that direction. This becomes apparent when you consider this vicious circle:

Fewer jobs > less revenue > less spending > less profit > cutting more jobs

And the cycle continues flushed and repeated for a long time, leading to a deeper recession...and deeper price drops.

Let's go back to Fed Chairman Powell's comments from Jackson Hole. Rising levels will cause pain... and...