Holiday Stock Rally is an “optical illusion”

Holiday sessions like this week have a naturally bullish bias for stocks (SPY). That’s because the joy of Thanksgiving usually trickles down to higher stock prices. The risk is giving this bullish move some meaning when the long-term trajectory remains decidedly bearish. Let’s list recent events that continue to point the compass toward more bearish stocks ahead along with our game plan for profit as stocks hit new lows in the coming weeks.



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Yes, stocks closed above notable resistance at 4000 for the S&P 500 (SPY) on Tuesday. But with more Christmas sessions due this week… then prices are likely to continue to rise a bit more.

The key at this stage, as far as price action is concerned, is whether the stock really has what it takes to clear the 200-day moving average hurdle (now at 4062).

Remember that this moving average (red on the S&P 500 chart below) is considered the long-term trend line that really helps delineate the bullish times from the bearish ones.

As you can see, the market turned bearish in a hurry this year with many failed attempts to break above it again. This time it will be no different.

Why?

Storm clouds are building for a recession to begin in the first half of 2023 as an after effect of the Fed raising rates to douse the flames of inflation.

Remember that the Fed has already told investors that its long-term approach will come with a measure of economic pain. While they “hope” to avoid a recession, they have to grudgingly admit that it’s not likely.

That message was delivered loud and clear by Chairman Powell at his 2/11 press conference following the most recent 75 basis point increase. He was asked if he “The window to create a soft landing for the economy had narrowed.”

The look on his face was even more powerful than the words in which he admitted that with inflation barely budging at this point, it would take a lot more ammunition from the Federal Reserve to win the battle against inflation. And therefore it is highly unlikely that he will create a soft landing.

If there is no soft landing, it means hard landing (recession).

Remember the famous words: Don’t fight the Federal Reserve!

So if they are telling you that they are far from done with their fight against inflation. And that the chances of a soft landing are close to zero. So it’s probably best to believe them and prepare for a recession that comes with lower stock prices.

Economists polled by the Wall Street Journal see the odds of a recession looming in the coming year as up 63% from the mid-October reading. This view falsely offers a bit of hope with a 37% chance that it won’t happen.

And now I’m going to pull the rug out by letting you know that economists have a terrible track record. That’s because the average recession has entered the picture when the average probability was only 40%. In light of that, appreciate how daunting that 63% recession probability is for our future outlook.

Wall Street analysts are also beating the recession drums, as the most recent weak earnings season has led to a significant drop in estimates for the future. The fourth quarter is nearing zero earnings growth. While the first 2 quarters of 2023 are decidedly negative.

What’s worse is that earnings experts like EarningsScout.com’s Nick Raich are expecting even steeper cuts in future earnings prospects. That’s because Wall Street is always overly bullish at the start of a recession.

The list of fearful indicators continues with the Chicago Fed’s national activity index this week dipping into negative territory once again. This is a pretty broad reading for the economy which is at the lowest level in 4 months. The change in trend back to negative usually points to even lower readings in the future.

Below we have the hit list of 3 different regional Fed reports all pointing in the wrong direction. That starts with the Richmond Fed reading on Tuesday going from a positive 5 for manufacturing to -9. Services also tilted negative at -3.

Thursday was no better with the Philadelphia Fed’s manufacturing index dipping to -19.4. New Orders was also pointing south at -16.2, which points to more bad times ahead.

Finally, when we look at the Kansas City Fed across the country, we see the composite index (manufacturing and services) at -10.

All of this begs the question; Why have stock prices been rising for about 6 weeks against such an obviously negative outlook?

Because a bear market is a long-term process made with lower lows and lower highs on rebounds. Not just a smooth elevator ride to the bottom. That point is clearly highlighted by the S&P 500 price chart that I shared earlier.

And it also comes out loud and clear for previous bear markets like 2008-2009 below:

And for the previous bear market from 2000 to 2003:

This recent rally will likely peak soon when the foolish bulls are frustrated at the 200-day moving average.

Wise investors will appreciate the lessons of history and should not become bullish by racing INTO a recession. That’s when it pays to bet on more market declines.

Once in the recession, with stocks pushing lower, is when it is prudent to start betting on the bottom, as the next bull market should be right around the corner. Not in advance.

So please enjoy the Christmas season. Don’t be fooled by the optical illusion of this festive rally.

What to do next?

Discover my special portfolio with 9 simple trades to help you profit as the market dips further into bear market territory.

This plan has worked like a charm since it went live in mid-August, generating a solid return for investors as the market tanked.

And now is a good time to reload as we face another bear market rally before stocks hit even lower lows in the weeks and months ahead.

If you’ve had success navigating the investment waters in 2022, feel free to ignore it.

However, if the bearish argument shared above makes you curious about what will happen next… then consider updating my “Bear Market Game Plan” which includes details on the 9 unique positions in my timely and profitable portfolio.

Click here for more information >

I wish you a world of success in your investments!


steve reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Publisher, Reitmeister Total Return


Shares of SPY were up $0.02 (+0.01%) in after-close trading on Tuesday. Year-to-date, SPY is down -14.83%, versus a percentage increase in the benchmark S&P 500 index over the same period.


About the author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. He is not only the CEO of the company, but also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. He learns more about Reity’s background, along with links to his most recent articles and stock picks.

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The charge Holiday Stock Rally is an “optical illusion” first appeared in stocknews.com

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