The WORST Stock Market Ever!

The more we understand why the stock market is behaving a certain way, the less volatile and illogical it seems.

The WORST Stock Market Ever!

There is no real trend. True. It is true. However, we need to understand the reasons for this. We can then better predict what will happen and how to trade to make profits. (Spoiler alert) I remain bearish. Gladly, I see 7 timely trades that can be used to make money in the S&P 500's (SPY) decline. Continue reading for the complete story ....

Two days ago, I awoke knowing the theme of this article.

The WORST Stock Exchange Ever!

This is because the ride is more Tilt-A-Whirl-like than Merry-Go-Round due to all the volatility. Soon, the cotton candy, corn dogs and elephant ears will be appearing. Sorry for the graphic...but it was necessary to make the point.

It is possible to see the bigger picture and make sense of it all, which will help us navigate to safer shores. This is today's commentary.

Okay, I might be joking about this stock market being the worst ever...but it sure is not fun. Because most people are rational and want things moving in a more controlled manner, this is because they don't like chaos. The stock market has been anything but orderly in recent years.

All around, up, down, and everywhere in between. Not just over weeks and months...but also INSIDE of one session. This candlestick chart for the last month tells this story well:

This chart has a lot to offer. It starts with us being completely flat month-over-month. This would indicate that there was no significant event.

Let's look at the details. Now, look deeper. Lastly, notice how large some of those candles have huge intraday moves.

All the action in the last month...but nothing to show for it on the market average.

It makes sense to look at the situation on a Sector-level, where there is more diversity between winners/losers.

It is obvious that the weak financials are a result of all the bad news from the banking sector. It's obvious that real estate is inextricably linked to the banks. The other weaklings are a Risk On group that speaks to growing concerns about future economic health.

It is also possible to find that the majority of Risk Off groups are at the top of this list: Utilities, Consumer Defensive, and Healthcare. It is surprising to see the strength of Tech and Communication Services. If you consider Tech as being dominated FAANG...and they often act like a defensive group people often cling too...then you realize that it was a Risk-Off month, even though overall market is still at risk.

All that has been discussed so far explained WHAT is happening... now let's move to WHY.

Simple answer: The outlook for the economy and stock market is uncertain. Each day brings new headlines, which can be either bearish or bullish.

People see the dangers that could lead to recession. But it never happens. This is what makes it difficult to predict what will happen next, and prolongs the tug-of-war between bulls and bears.

A lot of economic data, for example, was showing signs of weakness at the end 2022. ISM Manufacturing below 50. Retail sales actually fell after eliminating inflation. This resulted in a significant drop in expectations for corporate earnings for Q1 this year, where Wall Street currently expects a -9% earnings loss.

This steep loss is not as bad as it seems when you consider that many expected Q1 GDP to be in negative territory...perhaps indicating the beginning of a new recession. Yet, the most cherished GDP prediction model (GDP now from the Atlanta Fed), stands at +3.2% for this quarter.

Reity, you're starting to contradict your own beliefs. You thought you were bearish about the market?

Yes. It is true. I wanted to clarify WHY the market was volatile. This is due to mixed signals in the economy that make bears and bulls fight for control.

We now need to focus our attention on the future and what's likely to happen. This is where I will share the simple but effective formula that explains why I still wear the bear cloak. It also includes an important addition in bold

Higher Rates (5%+)

  • In place AT LEAST til the End of 2023

  • 6--12 Months of Lagged Economic Effect from Fed Policy

  • Banking Credit Crunch

= Fertile Soil to Cause a Recession in Future

Fed Chairman Powell spoke about the 4 first factors during the rate hike announcement and press conference held on 3/22. Stocks were actually rising during Powell's speech, until he struck people with a 1-2 hawkish punch staring with.

It's possible that the [banking crisis] will have very limited effects - these events may turn out not to have any significant effects on the economy. In this case, inflation will remain strong and the path might look different. This potential tightening could also lead to significant tightening of credit conditions over the course of time. If that happens, it means that monetary policies may have less work. "We don't know."

The statement that the credit crisis IS real was followed by a declaration that it is equivalent to a 25-50-point basis cut. Stocks fell from nearly +1% to just below breakeven. Then came punch #2.

The reporter said that investors expect just one rate increase of 25 basis points, and then rate CUTS at every subsequent meeting. Are investors right?


It was more than just his words. It was the way Powell said it. It's like a parent who is disappointed when their child brings home an F on his report card. (What are you missing? ).

He reiterated that they still expect no CUTS for this year, and he did so again. The S&P 500 lost the 1% gain and plunged to -1.65% at the close.

The above equation, which starts with a Fed that is hawkish, ends in recession for me. Not Q1...but Q2 as well as the rest of this year are still in play.

The extreme volatility and trading ranges that have been observed recently will not change until investors have more evidence of a recession. This is why I recommend that you invest based on what you believe will happen beyond this range. This is why I consider it to be a bearish view.

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SPY shares. SPY shares have gained 3.88% year-to-date compared to a % increase in the benchmark S&P 500 Index during the same period.

About the Author: Steve Reitmeister

Portfolio Reitmeister Total Return. Find out more about Reity, including links to his most recent articles as well as stock picks.