The writing on the wall

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It’s been nearly a month since stocks tested bear market lows, notes Steve Reitmeister by Reitmeister Total Return.

Much of this has to do with the very welcome drop in commodity prices, including lower prices at the pump.

This has some investors wondering if the bear market is now over. Good…This is not the case ! Yes, I understand that a simple statement is not a convincing argument. So let me spend more time explaining it in this week’s Reitmeister Total Return commentary.

First of all…have you seen my POWR Platinum presentation of Monday 7/11? If not, you should do it now, because I covered a wide range of important topics such as: why always a bear market, how far we will go down, lessons from market history bear market, the best resources for taming the bear market, and much more…

Assuming you watched the webinar above… now let’s pick up the story from there. This proves more and more that we are already in a recession. And if that’s true, which certainly seems to be the case, then appreciate the next shoe to drop in the bear market process.

That being an ongoing likely earnings recession. A growing number of pundits are pointing out that the second-quarter earnings season will likely trigger a series of lower estimates from Wall Street analysts. Really, these analysts have been slow to appreciate the true state of the economy and how far too high current earnings estimates are.

Which means now is not the time to enjoy peak income. The economy is weak, so earnings will logically decline.

The above only makes sense if the economy is weakening. So, after a surprisingly weak reading of -1.6% for Q1 GDP, we don’t expect much better in Q2. According to the most respected model, the Atlanta Fed’s GDPNow, we are looking at -1.2% for Q2.

Two quarters of negative GDP = Recession

This equation means that Corporate America is not doing as well. That should be on full display this earnings season and the second half of the year.

It’s not so much about the beat/miss nature of Q2 earnings. Rather, the key lies in the directions that these companies give for the future. Note that indications from early reporters already indicate that this diminished perspective is the case.

Now let’s appreciate that an average recession results in a 26% decline in S&P 500 earnings. I suspect this recession will be a little milder than average and will likely only see a 15-20% reduction in earnings.

However, even this mild earnings downturn has not factored into the current share price, as Kara Murphy, Chief Investment Officer of Kestra Holdings, stated in the quote below:

“The markets had already priced in a lot of this earnings slowdown, but they haven’t priced in an earnings recession. We’re not at a point where we could say the market is cheap.”

To be clear, slower earnings = slower growth.

Earnings recession = lower earnings estimates. And since this is likely imminent, stocks need to fall further to accommodate this weakened outlook.

Then consider the NFIB Small Business Optimism Index which came out Tuesday morning at 89.5, the lowest reading since January 2013. Worse still, 61% of business owners expect business conditions to deteriorate over the next six months.

This is the lowest level recorded in the survey’s 48-year history. Yes, less than during Covid or the Great Recession.

Now let’s add to the mix what Bontell is telling us about the recent yield curve inversion. This is where the ten-year Treasury rate of 2.97% is lower than the two-year rate of 3.05%. This signal is considered very bearish because it preceded so many recessions and bear markets.

Yes, I for one have pointed out in the past that the signal was skewed by the Fed’s long-term rate cut. But month after month they take their foot off those rates and they start to float closer to the real market values. This bearish signal is therefore becoming more and more significant.

Add it and the writing is on the wall. We are in a recession and the full weight of this outcome is not factored into the current earnings outlook.

When that outlook dims, the outlook for equities will push stocks to new lows during this bear market cycle. This is why I continue to have a mix of four inverse ETFs that accumulate gains as the market declines.

Somewhere between 30-40% decline from all-time highs of 4,818 we will likely find the bottom. That would be a low between 2,891 and 3,373. Yes, a wide range, but every bear market is different.

The key point is that with stocks currently at 3,818, it is not too late to use these strategies to take advantage of the bear market before moving on to bottom fishing for the best values ​​for the emergence of the next bull market.

Let’s not go too far ahead of us because it’s probably three to six months away. For now, it is a bear market, and it is better to trade accordingly.

Wallet update

A modest decline in the market this week = a modest increase in the value of our portfolio.

Again, with earnings season about to unfold, this should provide the next downside catalyst, as noted above.

So if it’s going to rain… you want to put rain buckets in to catch all the water. This is exactly what we have with our 6 portfolio positions shared below:

Short stocks: (HDGE, HIBS, SDS, TWM) There is never a shock in the way SDSdaily does daily given their clear alignment with the underlying S&P 500 and Russell 2000 indices. Question marks arise as to the performance of HDGE and HIBS that day. And even there, they are not aligned. For example, HDGE is a 1X inverse ETF that climbed +1.36% today while HIBS is a 3X inverse that only generated a +1.84% gain.

net, the sum total of these four positions was exactly what the doctor ordered as the bear market made its first push to lows a month ago. And will be again as we likely explore lower lows in the coming weeks.

Shorting Bonds: Taking a 62% gain on Own shares over 20 years (TBT) was certainly the right choice as ten-year rates slipped from 3.5% to 2.97%. However, as expected FolioBeyond Rising ETF Rates (RISR) is holding up better and I’m interested to see what happens to equities after the next Fed rate hike on July 27th. I hope I’m right in saying that we are still well aligned for the benefits of how the RISR is constructed. Otherwise, it will also affect the bricks.

As for ProShares Short High Yield -1x Shares (SJB), this is a greater realization by the investment world that this is indeed a recession that will get worse before it gets better. As this understanding grows, junk bond rates will also rise…as will SJB stocks.

Closing comments

By the way, I’m hosting an important webinar today, July 14, titled “100 Best Stocks for July”. This provides an in-depth look at our POWR Screens 10 product which is by far our most popular service this year given the outstanding outperformance even in the face of this bear market.

If you don’t have access to POWR Screens 10, I highly recommend watching the webinar to see if it’s right for you. Even if you’re not available to watch live, be sure to sign up below to receive an on-demand replay version.

Subscribe to Reitmeister Total Return here…

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