Holiday Stock Rally is an ‘Optical Illusion’

Holiday Stock Rally is an ‘Optical Illusion’

Holiday sessions like this week have a natural bullish bias for stocks (SPY). That’s because the joy of Thanksgiving usually spills over into higher stock prices. The risk gives this upward movement some significance when the long-term trajectory remains decidedly bearish. Let’s do a roll call of recent events that continue to point the compass toward more downside action ahead, along with our game plan to cash in as stocks make new lows in the weeks ahead.



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Yes, stocks closed above notable resistance at 4,000 for the S&P 500 ( SPY ) on Tuesday. But with more holiday sessions left this week… prices will likely continue to creep higher for a while longer.

The key at this stage, in terms of price action, is whether shares really have what it takes to clear the hurdle of the 200-day moving average (now at 4,062).

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

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

Why?

Storm clouds are forming for a recession starting in the first half of 2023 as a result of the Fed raising interest rates to quell the flames of inflation.

Remember, 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 reluctantly admit that is unlikely.

This message was delivered loud and clear by Chairman Powell from his 11/2 press conference following the latest 75 basis point increase. He was asked about “the window to create a soft landing for the economy had narrowed”.

His facial expression was even more powerful than his words as he admitted that with inflation barely budging at this point, it would take a lot more Fed ammunition to win the inflation battle. And thus actually very unlikely to create a soft landing.

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

Remember the famous words: Don’t fight the Fed!

So if they tell you they are far from done with the fight against inflation. And that the odds of a soft landing approach zero. Then it is probably best to believe them and prepare for a recession that comes hand in hand with lower share prices.

Economists surveyed by the Wall Street Journal see the odds of a recession next year up to 63% as of mid-October. This view falsely offers some hope with a 37% chance of it not happening.

And now I’m going to pull the curtain by informing you that economists have a terrible track record. That’s because the average recession has hit when the average probability was only 40%. In that light, you appreciate how frightening the 63% probability of recession is for our future prospects.

Wall Street analysts are also beating the bearish drums as the recent weak earnings season has led to a significant drop in estimates for the future. Q4 is approaching zero earnings growth. While the first two quarters of 2023 are decidedly negative.

What’s worse is that earnings experts, such as Nick Raich of EarningsScout.com, expect even steeper cuts to the earnings outlook going forward. That’s because Wall Street is always too optimistic at the start of a recession.

The call for warning indicators continues with the Chicago Fed National Activity Index falling back into negative territory this week. This is a fairly broad reading of the economy which is at its lowest level in 4 months. The change in trend back to negative usually points to even lower readings going forward.

Then we have the hit parade of 3 different regional Fed reports all pointing in the wrong direction. It starts with the Richmond Fed reading on Tuesday going from a positive 5 for manufacturing down to -9. Services also tipped over to negative at -3.

Thursday was no better with the Philly Fed Manufacturing Index falling to -19.4. New Orders also pointed south at -16.2 which points to more bad times ahead.

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

All of this begs the question; Why have stock prices risen for about 6 weeks in the face of such an obviously negative outlook?

Because a bear market is a long-term process made with lower lows and lower highs on bounces. Not just a smooth elevator ride to the bottom. That point is made loud and clear with the S&P 500 price chart I shared above.

And also comes through loud and clear for past bear markets like 2008-2009 below:

And for the previous bear market from 2000 to 2003:

This recent rally is likely to top out soon as foolish bulls are thwarted at the 200-day moving average.

Astute investors will appreciate the lessons of history and that you shouldn’t get bullish when you run INTO the recession. That is when it pays to bet on several market disadvantages.

When you’re in the recession, with stocks pushing lower, that’s when it’s wise to start betting on the bottom, as the next bull market should be just around the corner. Not in advance.

So enjoy your vacation. Just don’t be fooled by the optical illusion of this holiday rally.

What should I do next?

Discover my special portfolio of 9 simple trades to help you generate profits as the market descends further into bear market territory.

This plan has worked wonders since it was put in place in mid-August, generating a solid profit for investors as the market fell.

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

If you’ve successfully navigated the investment waters of 2022, feel free to ignore.

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

Click here to learn more >

Wishing you a world of investment success!


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


SPY shares were up $0.02 (+0.01%) in after-hours trading on Tuesday. So far this year, SPY has fallen -14.83%, against a one% rise in the benchmark S&P 500 over the same period.


About the author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his latest articles and stock picks.

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