Terrible September for stocks… How about October?
The fallacy of the summer rally has been dispelled. All of those gains have been wiped off the chart and now the S&P 500 (SPY) has hit a new bear market low to close September. That's the past...now, what should we expect in the future? More importantly, how should we trade the market in the weeks and months ahead? This timely market commentary will provide you with the answers.
shutterstock.com - StockNewsSeptember is historically the worst month of the year for the stock market. And September stayed true to form with a -9.4% shellacking for the S&P 500 (SPY).
Now the bear market stands at -25.6% from all-time highs. As bad as it sounds, remember that the average bear market decline is 34%.
Perhaps the biggest oddity of last week's slide to new lows is that it happened even as some rather positive economic news was released. It's a bit of a headache for some...but it actually makes a lot of sense in the grand scheme of things.
I will explain this conundrum and more in the Updated Market Outlook and Trading Plan that follows...
Market Commentary
The S&P 500 (SPY) had a strong +2% session on Wednesday. Yet all that joy was quickly wiped from the board on Thursday. And on Friday we were exploring new depths of this bear market at 3,585.
The reasons why this will seem antithetical at first glance. But by the end of this article, you'll understand how good news is actually bad news for investors right now.
Let's start with Thursday's jobless claims report, which fell back below 200,000. This is proof that the labor market remains very buoyant.
So why did the nose dip -2.11% on Thursday on this news apparently?
Because it gives the green light for the Fed to raise rates more aggressively to control inflation with the belief that they would do less damage to the economy.
But what many investors know is that employment is a dynamic-based concept. And that once it starts to go wrong...even if by little...it keeps rolling in that negative direction for a long time.
This is another way of saying that most investors don't fully trust the Fed to handle a soft landing. That's certainly true with history as a guide which is very difficult to accomplish, especially if you're late to the party trying to stave off inflation. (Which is absolutely the case here).
So if you're late, you need to act fast with bigger rate increases every time. This goes against a measured approach which is more likely to create a soft landing.
Another piece of good news is that some bad news came on Friday when the strength of the personal income and spending report showed extremely robust spending in the economy. So good that it single-handedly boosted the Atlanta Fed's GDP Now model from a growth estimate of just +0.3% for Q3 to +2.4%.
Sounds great...right?
Bad!
Let me explain the negative trend that normally follows periods of high inflation. When people are afraid of future prices, they are forced to rush out and spend more money now.
This increase in demand in the present becomes a decrease in demand in the future, which causes a recession.
In fact, you could almost say that with inflation, the economy seems almost at its strongest just before it hits a cliff. This picture of runaway inflation followed by recession and bear markets tells that story pretty clearly. (blue line = inflation rate and gray bear indicates recessions that coincided with bear markets).
With all this negativity said...I wouldn't be surprised at a relief rally next week just because the recent bear run probably ran out. We can perhaps expect a 3-5% rebound to form in early October. But don't count on another INSANE 18% rebound like we saw in July and August.
The above is what makes sense from a short-term price action perspective. However, this train is still run by the economy of the situation. This is how high inflation leads to recession and bear market.
Therefore, there will be a lot of attention for the parade of economic data that kicks off each month. Here is the current slate.
10/3 = ISM Manufacturing (the very weak ...
The fallacy of the summer rally has been dispelled. All of those gains have been wiped off the chart and now the S&P 500 (SPY) has hit a new bear market low to close September. That's the past...now, what should we expect in the future? More importantly, how should we trade the market in the weeks and months ahead? This timely market commentary will provide you with the answers.
shutterstock.com - StockNewsSeptember is historically the worst month of the year for the stock market. And September stayed true to form with a -9.4% shellacking for the S&P 500 (SPY).
Now the bear market stands at -25.6% from all-time highs. As bad as it sounds, remember that the average bear market decline is 34%.
Perhaps the biggest oddity of last week's slide to new lows is that it happened even as some rather positive economic news was released. It's a bit of a headache for some...but it actually makes a lot of sense in the grand scheme of things.
I will explain this conundrum and more in the Updated Market Outlook and Trading Plan that follows...
Market Commentary
The S&P 500 (SPY) had a strong +2% session on Wednesday. Yet all that joy was quickly wiped from the board on Thursday. And on Friday we were exploring new depths of this bear market at 3,585.
The reasons why this will seem antithetical at first glance. But by the end of this article, you'll understand how good news is actually bad news for investors right now.
Let's start with Thursday's jobless claims report, which fell back below 200,000. This is proof that the labor market remains very buoyant.
So why did the nose dip -2.11% on Thursday on this news apparently?
Because it gives the green light for the Fed to raise rates more aggressively to control inflation with the belief that they would do less damage to the economy.
But what many investors know is that employment is a dynamic-based concept. And that once it starts to go wrong...even if by little...it keeps rolling in that negative direction for a long time.
This is another way of saying that most investors don't fully trust the Fed to handle a soft landing. That's certainly true with history as a guide which is very difficult to accomplish, especially if you're late to the party trying to stave off inflation. (Which is absolutely the case here).
So if you're late, you need to act fast with bigger rate increases every time. This goes against a measured approach which is more likely to create a soft landing.
Another piece of good news is that some bad news came on Friday when the strength of the personal income and spending report showed extremely robust spending in the economy. So good that it single-handedly boosted the Atlanta Fed's GDP Now model from a growth estimate of just +0.3% for Q3 to +2.4%.
Sounds great...right?
Bad!
Let me explain the negative trend that normally follows periods of high inflation. When people are afraid of future prices, they are forced to rush out and spend more money now.
This increase in demand in the present becomes a decrease in demand in the future, which causes a recession.
In fact, you could almost say that with inflation, the economy seems almost at its strongest just before it hits a cliff. This picture of runaway inflation followed by recession and bear markets tells that story pretty clearly. (blue line = inflation rate and gray bear indicates recessions that coincided with bear markets).
With all this negativity said...I wouldn't be surprised at a relief rally next week just because the recent bear run probably ran out. We can perhaps expect a 3-5% rebound to form in early October. But don't count on another INSANE 18% rebound like we saw in July and August.
The above is what makes sense from a short-term price action perspective. However, this train is still run by the economy of the situation. This is how high inflation leads to recession and bear market.
Therefore, there will be a lot of attention for the parade of economic data that kicks off each month. Here is the current slate.
10/3 = ISM Manufacturing (the very weak ...
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