I’m writing this on Sunday and the stock market is closed Monday. Bitcoin is crashing again, though, this weekend as it’s dumping below $20,000. It’s obviously going through a crash and the argument that it was a safe haven or replacement for money, much less a store of value, has been evaporated, as several crypto exchanges this month have suspended customer withdrawals. No one in their right mind would put their money into crypto as a safety position now. They’d be better off burying their money in jars in their backyard or buying gold and putting it away somewhere.
The S&P 500 posted its worst weekly drop last week in two years. A few months ago I was looking for the 50% retracement level of the March 2020 bottom and the bull market peak as a potential bottom point for the S&P 500. That price target is basically the 3500 area of the S&P 500. We are not far from that now and earlier this year I was suggesting that the 3400-3600 was an area to look for a possible bottom.
Earlier in May I started to think that this bear market would reach an end below those support levels as when the market fell to new lows in May no real fear came into the market and no fear has yet to come into the market. As the market cracked through support in May the VIX barely went up.
In my view we are now in what is phase two of the typical three phases of a bear market. Phase two is when people recognize it’s a bear market, but most people decide to just ride things out. Phase three is when there is a panic decline in the markets that make a final bottom as all potential sellers get flushed out in capitulation.
That’s what happened in July of 2002 and in the first quarter of 2009 for the stock market and in July of 2015 for gold.
If you look at this image the rise in popularity of guru Cathie Wood typified “new paradigm” thinking and the last rally that ended in May represented “return to normal” as the notion that inflation would peak and everything would be like it was became the story line used to justify that rally and now we are in the fear phase. I think we’ll see another rally before capitulation selling and true despair among the stock market masses.
Meanwhile, we are getting signs of a recession now and the real estate futures market is projecting a slight dip in real estate with a bottom happening in the first quarter of next year. Fed fund futures are also projecting that this rate hiking cycle will end in the first quarter of next year. It seems likely to me that we are in a recessionary period in the economy that will make a trough next year in the first quarter.
In July it looks like the Fed will hike by another 75 points and likely go back to 50 point hikes at its meeting after that, which occurs at the end of September.
All this sets up a bear market that can continue into the end of this year and perhaps into the first quarter of next year.
However, I could see the market making a short-term bottom in July around the next Fed meeting and then rallying into the September meeting on hopes that the Fed will be more dovish with 50 rate hikes.
Such a move would likely setup another third decline when it is over that could mark the last phase of this bear market.
Energy stocks, which have been the best performing sector in the market year to date, took a hit last week, so we are in a moment where everything may decline into some sort of temporary low in the markets in July.
I’m not thinking we’re heading for a big drop, just more slowly drifting downwards action.
It’s a tough market now, in many ways the trading action on in the S&P 500 and Nasdaq is very similar to the way gold stocks and the HUI have traded when they have been in bear markets. They’d have bad big weekly drops, punctuated by periods of sideways movement that cause people to get hopeful and fall asleep again on the risks.
To sum up, the market is in a strong downtrend, but I’d expect some sort of bounce or period of sideways drifting action to begin sometime around the next July Fed meeting that could last into the end of September and set the stage for another decline into the end of the year.
All that said, I have zero interest in trying to play some sort of rally in this stock market until I think the bear market is truly near an end.
There will be a great opportunity to buy to invest when this bear market is over and that’s what I’m waiting for.
It is just so hard to try to play short-term rallies in the stock market as that means going against the primary trend of the market and typically just causes one to churn their money when they try to do that. The danger in that isn’t just losing on the trades, but that it becomes such a distraction that you miss the great buying opportunity that will come when the bear market is over.
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-Mike
