Folks, the market is in a very precarious situation right now…
The S&P 500 Index, our broad measure for stocks, is frothy with volatility. And the market has endured a series of rallies and crashes since the beginning of this year.
Don’t let this back-and-forth environment bait you into taking unusual risk.
I’ve learned an important lesson during my 40-plus-year career in the financial industry…
Investors can lose more money turning prematurely bullish in a bear market than in the steep, early declines.
We discussed the fears of a financial “hurricane” about a month ago. As I said at the time…
The day of reckoning is getting closer. In short, a three-fold dynamic is driving stock prices lower…
- Rampant inflation higher than 8%, year over year
- Impending interest-rate hikes and a deleveraging of the Federal Reserve’s balance sheet
- A collapse in price-to-earnings (P/E) ratios – particularly for megacap and speculative growth stocks that led the bull market to all-time highs
The P/E ratio for the S&P 500 has dropped nearly 50% from its peak. But that doesn’t mean the market is “fairly priced” today…
Growth can still experience a slowdown. In fact, that’s playing out right now as businesses hunker down for a recession…
Layoffs are rampant. And non-core projects are being canceled.
As I’ve said before…
In past Fed rate-hike cycles that were fast like this one, P/E ratios didn’t bottom until well into a bear market. That’s when analysts started cutting their earnings estimates.
So plain and simple…
The short-covering rallies in stocks in recent months are typical of bear markets. Now, the other shoe is about to drop. And you need to pay attention to one thing in particular…
The biggest unknown – and biggest risk – for the stock market is second-quarter earnings reports and management’s guidance for the rest of 2022.
We’ll need to watch these reports closely. They’ll help us see how companies’ management teams are dealing with rampant inflation and an impending economic recession.
Widespread layoffs and hiring freezes like the ones announced by software giant Oracle (ORCL) are noteworthy. Combined with sharply higher interest rates and a shrinking of the money supply from the Fed, continued fears could generate a broad liquidation of stocks.
So it’s no surprise that the past month has seen typical, volatile bear market price action…
The markets have experienced a series of sharp declines followed by swift retracement rallies.
However, in the end, the S&P 500 is still showing a bearish pattern of lower highs and lower lows. It’s clear on the chart. Take a look…
Lower lows and lower highs are a classic bear market pattern.
Investors need to take this pattern seriously. It’s the one thing we need to pay attention to right now.
Don’t let little bear market rallies suck you in. You’re not going to “call the bottom” doing that. You’ll just wind up with a lot of frustration – and likely more losses.
If the S&P 500 were to close above 3,950 or 4,000, it would be constructive from a short-term perspective. Still, that might be difficult to achieve given the flood of economic and earnings data coming out this week.
So for now, be patient. Keep watching for the washout buying opportunity I expect to happen later this year.
From what I’m seeing, it could happen around September or October in the range between 3,400 and 3,600. That means the S&P 500 could drop another 5% to 10% from here.
Until then, stay vigilant. And don’t let a bear market rally burn you.
Good investing,
Marc Chaikin
