Stocks rush down

The S&P 500 (SPY) fell 15% in just a few weeks. Of course, we could see a short-term bounce here or there. Unfortunately, most signs are still pointing down. Why is this the case? How low could we go? And what is the best way to trade this market? A 40-year investment veteran, Steve Reitmeister provides the answers in his New Market Insights below.

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(Please enjoy this updated version of my weekly Reitmeister Total Return newsletter commentary).

On Tuesday, we retested the June lows at 3,636 for the S&P 500 (SPY). Even dipped below the mid-term, then closed just above at 3,647.

So now that we've retested the lows and closed above...does that mean we've found the bottom of this bear market?

NO WAY!

The reasons why we will be heading lower and the bear market trading plan is what will follow in this week's commentary below...

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Market Commentary

On Tuesday, we saw classic stock market behavior.

This is where the market has been down, down, down for quite some time. Then comes a big juicy morning bounce to open Tuesday's session. However, tick by tick, it is lost to become a loss. Worse still, we retested the June lows at 3,636 for the S&P 500 (SPY).

Note that this type of session often occurs 2-3 at the end of a bearish run before a lasting bounce ensues. This is because each higher bounce gives spooked investors one last chance to sell at a slightly better price.

But note that I said rebound...not the start of a new bull market. We're a long way from having that conversation because we haven't yet seen how badly the economy will deteriorate as the Fed steps hard on the brakes.

This means we need to evaluate:

How low does GDP get How much will the unemployment rate increase How big a reduction in the outlook for corporate earnings And therefore how many stock market valuations need to be reduced to reach the bottom.

Too many investors view a bear market as an event. As a 1 time thing. Instead, it's a process that typically takes over a year to complete.

Unfortunately for all of us, the most recent bear market in memory was the Covid crash of March 2020 which lasted a surprisingly short but painful 3 weeks before the bottom was found at 34% and then a new one. bull market ensued.

What people forget about this "one-of-a-kind" bear market is that Treasury rates also fell below 0.5%, making it the ONLY investment game in town. This is what caused the rebound so early even as the global economy rapidly swirled down the toilet.

This time around, we have a probable recession caused by rampant inflation that the Fed is DETERMINED to tame. That means we actually have skyrocketing rates this time around. And so investors have to weigh the value of stocks against a 10-year Treasury bond around 4%. This makes stocks much less attractive in comparison and why the bottom will not be found so quickly and easily.

Long story short, we're still in the middle of a long-term bear market that hasn't bottomed yet. So let's talk price action from here and how it relates to our trading plan.

Luckily, I wrote a detailed article about it last week. I'll repeat it here with some modest updates on key S&P 500 (SPY) levels to keep the information fresh and timely:

3,636 = June lows. You will rarely see a correction or a bear market that ends without retesting the lows. So that's likely the next fulcrum as we explore the true depths of this bear market.

It may be difficult for stocks to go below this without seeing some of that pain on display that the Fed has been talking about. Like the job market finally showing some weakness.

So if we rush there and pain isn't on the menu yet, then that'll be enough support, maybe with another juicy bounce to follow. Not a crazy 18% rebound as they say in July/August. Maybe rather +5-10% while waiting for the next economic signals.

If and when the economic pain train is on the way, stocks will continue to fall.

(Update 9/27/22: So we are retesting those June lows. And for now, the pain predicted for the economy by the Fed is not yet visible.

Maybe we'll turn down now...like maybe 3,500 and then see a bounce. Or maybe one is rolling out now.

Again...