Why are stocks bearish again?

The S&P 500 (SPY) rebounded 18% from June lows until it hit a wall in mid-August. At first, it looked like the reason was simply to hit the resistance level at the 200-day moving average. But really, if we're honest with ourselves, it's a wake-up call to the negative outlook for the economy. We can all thank Fed Chairman Powell for putting it on the tablets transmitted from Mount Jackson Hole. So where do you go from here? And what is the best trading plan right now? Read below for the answers.

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One of the most confusing things for investors is the correlation between the current economic situation and the evolution of stock prices.

If the economy looks good and the market goes down, it seems counterintuitive. The same goes for the darkest hour of a bear market when stocks start to rise while the economy is still in a terrible state.

It's one of those times when investors are a little baffled by the contradiction between the seemingly healthy economy and the red arrows teeming with stock prices. So, let's tackle this hot topic in today's commentary.

Market Commentary

After the first close below 4,000 on Tuesday, there really was a "battle for the soul" of this stock market. At the start on Wednesday, the bulls were in charge, rushing over 4,000. Then, tick by tick, the bears started their way back. In the end, the S&P 500 (SPY) fell again on Wednesday to close at 3,955.

Yes, there was a small rebound on Thursday for the S&P... but the "Risk On" positions took a beating as shown by the -1.15% posted for small caps in the Russell 2000. So, start another session for the bears with yet it was a third straight near 4,000.

And then on Friday, larger early gains were knocked off the chart to close over 1% at 3,924, marking the fourth consecutive week of losses. Most technical analysts would call this a confirmation of the break below 4000 as it moves from support to resistance.

All of this recent negativity seems pretty strange because there are clear positives to point out in the economy. Like 315,000 jobs added in August to maintain healthy employment trends. We could talk about many other individual economic reports showing growth, but it's best to focus on the US GDP picture because it takes everything into account.

The Atlanta Fed's recently updated GDP Now estimate for the third quarter has just been raised to +2.6% after a strong performance by the ISM manufacturing index. This is in stark contrast to the pain taken from stocks on the same day as they fell further below 4,000.

This brings us back to the theme mentioned in the introduction: How can we explain the recent weakness in equities in light of strong economic numbers?

The simple answer is that investors are always looking to the future. Like what's likely to happen around the corner so they can make adjustments before it's too late.

Remember that the majority of money in the market is invested by professionals. Not individuals.

While you and I can go from 100% long to 100% short in just minutes in our online brokerage accounts. The same is not true for professionals who often have to manage billions of dollars. Some having such large positions concentrated in a small collection of stocks that if they sold them too quickly, their stocks alone would crater the stock.

That explains why they have to anticipate. So they can strategize to make major changes in their portfolios that could take weeks or months.

So what are the predictions of the pros?

Inflation is still too high and will not subside anytime soon. Add to that a VERY belligerent Fed hammering the table that it will continue to raise rates through 2023 and it will cause economic PAIN.

Those who didn't understand this basic equation learned it last week from the mountaintops of Jackson Hole, where stock prices have since fallen. That means investors got the memo.

Note that everyone had this memo in hand in May/June, but somehow lost it during the outsized and absurd July/August gathering. Now it is recorded on their monitors again.

The message is also getting on Wall Street, as Q1 2023 earnings estimates have been cut to show just 3% earnings growth. Worse still, the second quarter of next year is virtually without growth. That's a far cry from the 10-15% earnings growth we've seen in recent quarters.

Also take a look at the fall in commodity prices last week. Namely the oil...