Stock Market Déjà Vu…Part 2

Stock Market Déjà Vu…Part 2

Last week, we talked about how it felt like deja vu as the S&P 500 (SPY) embarked on its 3rd bear market rally of the year. Today it feels even worse, as the market is quickly regaining these hard-fought gains. Today’s market plunge is 4%, compared to yesterday’s short rise that seemed to indicate that the FOMC was advocating a slowdown of the pace at which hikes are being made. These hopes were dashed when FOMC Chair Powell, a hawkish stance, resisted this idea and stuck to his hawkish views during the press conference. He stated that the terminal rate could rise much higher, which was the reason for the selloff. Today’s commentary will discuss the Fed meeting, the reasons it was a bearish development and confirm our bear market thesis. Continue reading to learn …. more. – StockNews

(Please enjoy this updated version of my weekly commentary originally published November 3rd, 2022 in the POWR Stocks Under $10 newsletter).

Over the last week, the S&P 500 (SPY) is down by 2%. It’s a brutal ending to the bear market rally. In fact, it is better evident if we look at the Nasdaq 100, where 2 of the market’s generals have been slaughtered and laid to waste – GOOGL and META.

The index has already given back about 75% of its gains from the bear market rally. In contrast, the losses for the Russell 2000 and S&P 500 are much more muted.

This is a continuation of a theme that we discussed last week – the “market of stocks’ is holding up much better than the stock market.

This shouldn’t surprise given the rise of long-term rates, which is more of an obstacle for large and mega-cap stocks.

The Fed or the market could ease the rate rise if there is a weakness in the economy or inflation data. This doesn’t appear to be the case, although we will find out more about the state the employment market tomorrow.

However, there has been no evidence of widespread weakness in employment (based on unemployment claims), which means that rates will be higher for longer.

Why the FOMC Was so Bearish for the Markets

One of the reasons behind the “bear market rally’ was the belief that the Fed could be on the verge of “pivoting’ in terms of slowing its pace of hikes and eventually stopping sometime in early 2023. This is now in doubt due to the stubbornness and core inflation that make it clear that hikes will continue for a significant time.

Now, we are back to the initial conditions which made January 2022 so bearish. While rates are rising, growth is slowing. However, growth isn’t slowing enough to force the Fed to pivot.

Rates will continue rising until the economy or inflation stops.

Rising rates are a powerful headwind for stock markets. We learned this year that the most bullish scenario for the stock market is one that has a choppy sideways market and sees some nice rallies from oversold conditions.

While the most bearish scenario is that the S&P 500 (SPY) plunges lower when we get the combination of rising rates and negative news on the earnings or economic front. Now that the bullishness has ended, I expect the market to return to normal over the next few weeks.

Portfolio Strategy

We are back to a neutral setting and prepared to take more action if the market breaks key levels on the downside which includes the October lows of around 3,600. I would expect that cyclical stocks will lead on the downside while sectors and defensive stocks would outperform.

What To Do Next?

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All the Best!

Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter

SPY shares were trading at $373. 35 per share on Friday morning, up $2. 34 ( 0.63%). Year-to-date, SPY has declined -20. 48%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers find risks and opportunities in the markets. He is the Chief Growth Strategist for and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.


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