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Stock Market Bull Trap Sprung As Economic Data Confirms Stagflation Era Is Set (Why Stocks Are Falling) – Mike Swanson

You need to understand what is happening in the markets as this is a very tricky time we are in. The only way to make money is to deal with the reality of the markets and go with them.

On Friday, before the open I made note that the S&P 500 technical daily stochastics were giving an overbought reading and a down day would give a sell signal for the market. This wouldn’t matter in a bull market, but in a bear market it signals a time to make adjustments. By the end of the day the market got smashed, with the DOW falling over 800 points and is poised for another gap down this morning.

The sell signal got triggered by the drop and the rally that began at the end of May has turned into another bull trap.

During that last rally a lot of people were coming out and calling for a giant rally or claiming that what they saw as a simple market correction was over. To make their arguments people like Cathie Wood claimed that the inflation data was peaking and that the Federal Reserve would stop raising rates by September. She was one of many making these sort of predictions and around three weeks ago they multiplied all over the place by traders who made comments on Twitter and people on Youtube who basically repeat what Ms. Wood says to get a following of their own.

These predictions were based on nothing, but were merely wild hopes and fantasies as nothing in the markets or economic data justified them. They ignored the fact that Fed fund futures were pricing in rate hikes in September and beyond that would take the Fed funds rate up to 3.5% by the first quarter of 2023. Oil prices also continued higher in May, which seemed to make the predictions silly, but people kept making them anyway.

They simply wanted a justification for believing that they had only gone through a market correction and now everything would go back to the way it was before the Nasdaq turned down after the New Year.

These people were wrong.

And they demonstrate once again that stock market predictions are completely useless.

All that matters is identifying the overall trend of the market, going with it, and making changes when the trend clearly changes.

And we are in a bear market now in the stock market.

I define a bear market as one in which the market trades below the 150 and 200-day moving averages and those moving averages trend down and act as resistance. This is simple Stan Wesintein style stage analysis.

As you can see, the S&P 500 was not even able to get back above its 50-day moving average on its most recent rally, which is the blue line on this chart.

One troubling thing about Friday’s action is that the VIX “fear index” only went up 8% despite the big declines in the S&P 500, DOW, and Nasdaq. The VIX in fact closed below $28.00 and is lower than where it was six weeks ago.

There is little real fear among those invested and still trying to trade the markets, and market corrections and bear markets tend to end in mass fear and capitulation. In fact the Fidelity order flow shows individual traders who have accounts with them were putting in a lot more buy orders than they were sell orders on Friday, even making the 3X Nasdaq ETF their second top buy – something only a wild gambler would put money into.

I don’t know what the market is going to do on Monday or how it will gyrate on Wednesday after the Federal Reserve releases its next FOMC statement, but what does matter is that last week’s action simply suggests that the rally that began at the end of May is over and now the market is going down to its lows and will likely break them for another leg down at some point this summer.

That is what is important.

This bear market does not look like it is going to end anytime soon and no one can predict when it will really end.

My guess is next year in the first quarter as the real estate futures market is forecasting a slight dip in real estate prices that will end in then. So, that is likely a recessionary trough.

Just as important is the economic news that came out Friday, which shows that this is not a mere correction in the stock market, but a decline associated with critical macro changes in the economy. The CPI numbers came out and revealed the biggest annualized increase in consumer inflation since 1980 with a monthly increase of one percent over the previous four weeks, dwarfing April’s 0.3% gain.

Instead of peaking as some predicted inflation accelerated.

This caused the odds of further rate hikes to jump, with the Fed Funds pricing in a 50 point rate hike in September, when some were claiming that they would be pausing by then. There is even a 40% chance of a 75 point rate hike this week.

The Consumer Confidence numbers also came in and registered the lowest reading for this figure since 1980 – a reading below the depths of the 2008-2009 recession.

That’s a big warning that we are in a recession now or about to be in one and the last quarter actually brought a negative GDP growth print.

Put it all together and the data blew apart the arguments the stock market bulls were making and reveal that we are in a stagflation environment that is going to last for years. The inflation in the economy is actually hurting people more than the decline in the stock market and crypto coin world. The price of gas going up is more important than what Bitcoin does.

I believe now is the time for people who have not done so yet to raise cash reserves by selling losing positions they may have and to be wary of holding on to anything lagging the market averages. The way to be a winner from a bear market is to be one of the few able to buy after it is over and everything is sold out and cheap. That means having cash reserves on hand and not being one of the masses who tried to ride things out and then ends up selling in mass panic with everyone else.

The reality is the way to lose a lot of money is to be investing and “HODLING” things that lag the S&P 500 as they are prone to getting crushed during market declines.

The era of thinking in the terms of hot stock picks or crypto trades is OVER!

To beat the market you have to focus only on those things that are beating the market and somehow going up or remaining bullish despite the bear trend dominating the overall stock market.

That means think commodities and buying commodities and commodity related stocks on dips.

The price of gold has been outperforming the S&P 500 all year, even though it came back down towards support after surging during the month of the start of the war in Ukraine.

Notice the gold/spy relative strength ratio on the bottom of this chart.

I believe that gold is going to do incredible over the next several years and beat the performance of the DOW and S&P 500 just like it did in the eight years following the March 2000 stock market bubble peak and during the decade of the 1970’s. In my view the financial markets are best understood now as a mishmash combo of those two decades with a financial bubble coming undue and high inflation and a bear market in bonds.

This is one reason I hold core investment positions in gold and silver, but I cannot predict when gold will rally strong enough to shoot through $2000 an ounce, which is what it will need to do in order to get the masses interested in it at all.

Until then it is a sleeping giant.

But on Friday gold went up $22 on the day the most recent stock market rally rolled over and Newmont Mining was the top gaining stock in the entire S&P 500, up over 3% on a day in which just about everything else was deep in the red. Gold is down this morning, but at some point I expect we’ll see it breakaway from the market action and rally. I’m just not sure when that will happen though.

A lot of people feel trapped in the market now as they think they MUST have all of their money invested in stocks and/or bonds and that their only alternative is cash, which they see as “trash” as it can’t make them anything.

The problem is bonds are in a secular bear market too and so they are getting crushed and that bear market in bonds is going to last for years.

A solution for them is to move some of their money into gold.

It’s outperforming the stock market.

So when the market falls it will decline less than the S&P 500.

That’s what it did when the market crashed in March of 2020; gold fell about 1/3 less than the S&P 500 during that decline, making it safer than the stock market.

And gold has the potential to break into a big rally in the coming months.

It is safer than the stock market and has potential whereas crypto has none (it just trades with the Nasdaq) and buying bonds means guaranteeing losing at least some amount of the value invested in them thanks to inflation.

Cathie Wood has claimed that Bitcoin is going to a million and you have seen countless predictions over the years that when the stock market fell Bitcoin would soar. The reality is the opposite has happened and Bitcoin is badly lagging the stock market in this bear market.

Despite the predictions of so many crypto gurus, Bitcoin is now acting as a financial millstone in investment accounts.

Gold, as a source of stability when compared to bonds, is essentially a necessary investment to have in this market environment.

I’m not saying put all your money into gold, but everyone knows that long-term investing means being well diversified and it makes all the sense in the world now to move at least some of the money one would have traditionally invested in bonds for “safety” into gold.

And in the end cash isn’t really trash in a bear market.

You must have the ability to buy when the bear market is over if you want to be one of those that benefit from the bear market.