This Is the ‘Next Shoe to Drop’ for the Stock Market

Happy New Year!

The brutal year of 2022 has finally passed and we are now entering the new year of 2023. 

What should we expect for the upcoming new year? If you feel you have been hit too much this year and wish a much better year is coming, I wish you good luck. Unfortunately, we are probably far from the ultimate bottom of this bear market. One strong argument to support this bearish view is the likely earnings surprises to the downside. The market won't fare well when the earnings are declings more than expected. This is probably the next shoe to drop for the market!

Stay safe and be cautious in 2023!

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To explain why, I'll briefly turn to one of history's all-time great investors: Stanley Druckenmiller.

For those who aren't familiar, Druckenmiller famously earned 30% average annual returns over his career without a single losing year. That's among the most impressive long-term track records in the history of the markets.

In a recent interview at the 2022 Sohn Investment Conference in New York, Druckenmiller was asked about his experience investing near the peak of the dot-com bubble in 1999-2000.

During his response, he pointed out that there had been a relatively rare confluence of market factors that should sound familiar to investors today. Specifically, he noted that long-term interest rates, the U.S. Dollar Index (DXY), and crude oil prices had all increased sharply over the prior year or two.

He wasn't quite sure what to make of that at the time. So, he asked an analyst friend to crunch the numbers, and what they found was startling.

In short, whenever that combination of factors had occurred in the past, corporate earnings had fallen by roughly 35% on average over the following year or two.

Now, Druckenmiller didn't specify the exact time frame of this analysis. But a quick look at price charts from that period turned up the following rough estimates:

• Interest rates (represented by the benchmark 10-year U.S. Treasury yield) rose as much as 65% during that period.
• The DXY rose as much as 23%.
• West Texas Intermediate (WTI) crude oil rose more than 200% at its peak.

So, how does that compare to the current environment? Well, over the past 18 months or so:

• Interest rates are up over 200%.
• The DXY is up 23%.
• WTI crude is up over 200% (and more than 1,000% from its COVID-19 lows).

In other words, we appear to have a similar – or even more extreme – setup today.

That suggests we could see a sharp decline in corporate earnings over the next several quarters. And this, in turn, could trigger another significant drop in stocks.

Given that consumer price inflation is running above 9% by official measures today, it's possible earnings may fall less than expected this time as well.

However, even a more modest decline in earnings could trigger further downside in stocks.

For example, the S&P 500 currently trades near 4,000, with a P/E of around 20. If earnings were to fall by just 15% – less than the decline in any of the 1970s recessions – while the P/E remains stable, the index would trade below 3,400 (15% lower).

However, while the S&P 500's P/E has fallen significantly from its recent extremes, it's still trading well above its long-term average of roughly 16.

If earnings fall by 15%, while the S&P 500's P/E drops to 16, the index will trade below 2,500. That would represent a decline of roughly 35% from current levels.

Yet even this estimate may be too optimistic.

Market valuations tend to be "mean reverting" – they tend to return to their long-term average over time. But the more "stretched" they become in one direction, the more likely they are to overshoot that average as they move the other way.

The S&P 500 reached a peak P/E of just over 45 in June 2021. That's the second-highest valuation we've ever seen – only slightly behind its all-time record of 47 during the dot-com boom and bust in the early 2000s.

Given this extreme, it's not unreasonable to think the market could trade well below this average valuation before making a longer-term bottom. And this is where the numbers start to get frightening.

For example, if earnings fall by 15%, while the S&P 500's P/E also drops to 10, the index will trade around 1,800.

That would be a decline of more than 50% from current levels. And if earnings were to fall more than expected, the downside would be even greater.

To be clear, I'm not predicting the S&P 500 will fall this much. But it easily could if earnings weaken significantly in the months ahead. And I believe most investors are completely unprepared for that possibility today.

Justin Brill

Santa does not yet want to leave

Happy New Year!

It seemed to be a brutal last trading day of the year and Santa appeared to have left the town. But I was not yet convinced that he had left.

After taking off a lot of profits from the table today with my shorting positions placed yesterday, I thought to give Santa another chance to come back. Well, it seems Santa indeed has not yet gone😍 The SPY call we placed when the market was deep in the hole during the day has already shot up over 30% by closing. I bet we may likely see another good new year's first trading day next week. 

Keep fingers crossed and God Bless us and all!✌😇

Wish everyone a very prosperous 2023💰 See you all in the new year🎺🎻🌷🍄

Santa has returned!

After the Christmas break, the market had been sold off relentlessly for two days and it seemed the only direction for the market was down.

As a contrarian, I still kept my faith in Santa Claus and yesterday I told my Family that we might see a bear trap developing. See below and I was buying yesterday during the brutal selloffs. 

I'm glad I did so! Today, all of a sudden out of blue, Santa Claus is coming back 🤗🤓 and he is bringing a huge bag of 💰 for anyone who has not lost faith in him!!

Beginning of a market plunge

Many people, like Jim Cramer, assume that as soon as the Fed "pivots," such will be bullish for equities. While no one knows when the Fed will pivot (aka reducing the rate), it will do so at some point. The million dollar question is whether the Fed pivot will immediately trigger a market bull run? I hope so but history has shown an opposite picture.

Historically, when the Fed cuts interest rates, such is not the end of equity "bear markets," but rather the beginning. Such is shown in the chart below of previous "Fed pivots."

Notably, most "bear markets" occur AFTER the Fed's "policy pivot."

The Fed was extremely clear they are going to hike rates until "inflation" is on a trajectory towards its 2% target. The Fed is currently using very blunt instruments to achieve that goal, which will most likely result in a recession. As I have said repeatedly, a recession is nearly a certainty. And in this scenario, the market still has a long way to go to search for the bottom!!

How is your money wasted....

Clowns and Jokers Plus, what would Bill do differently? BILL BONNER DEC 23 (Source: Getty Images) Bill Bonner, reckoning today from Youghal, Ireland... Clowns to the left of me Jokers to the right ~ Jerry Rafferty, Joe Egan More hilarity for the Christmas season! We all know that the US owes $31 trillion. We all know too that it can't pay it.  Imagine what it would take. Instead of running a $2 trillion deficit, the pols and hacks in Congress would have to cut $3 trillion from the budget to get a $1 trillion surplus – and do it for the next 31 years! Not going to happen. Instead, the plan is to spend, spend, spend…until daddy takes the credit card away. What will actually happens is this:  The feds will continue to spend, irresponsibly…wantonly…and stupidly.  Bloomberg has the latest: US Senate Passes Giant $1.7 Trillion Spending Bill With Ukraine Aid, Election Change The Senate easily passed a more than $1.7 trillion government funding bill that includes more aid for Ukraine and changes to the way presidential elections are counted.  Passage of the bill funneling $47 billion toward the effort to help Ukraine's defense against Russia came a day after Ukrainian President Volodymyr Zelenskiy addressed the US Congress in his first trip outside his war-torn homeland since the invasion began.  Out the Wazoo! This spending will shift more and more of the nation's resources towards unproductive, or anti-productive, uses – such as buying weapons for the Ukrainians…. or simply giving them money to put in their Swiss bank accounts. The effect will be to reduce the real wealth of the USA…while also increasing the amount of dollars flushing through the system. The dollars will multiply when the Fed finally abandons its inflation fighting and 'pivots' back towards more money printing. It will do that when the coming recession softens inflation numbers while it sharpens the pain felt by ordinary families...as well as by the elite.   Already, the middle class has seen its real wages fall for 20 months in a row. And soon, its houses – where it stores its wealth – will fall in value.   As for the rich, they've lost about 20% on their investments so far. By our estimate, they've got another 20% to go to get down to reasonable prices…and then 20% more on top of that as investors inevitably give up and prices 'over-shoot.' Then, amid the gnashing of teeth and wailing of widows the feds can go back to what they do best – destroying the economy with fake money and foolish spending. The Fed will also be happily destroying the value of US bonds…which just happen to be the instruments in which US debt is calibrated. Yes, the common people, with their common sense, know that you can't spend more than you earn forever. But the elite know how to make a buck off of it. Thus, will the debt be reduced…and eventually eliminated, as Americans also see their savings and living standards greatly reduced. But the stock market will be reflated…and the deciders will find ways to profit. But stepping back to the present, we note that the pain and suffering of America's future bankruptcy could be averted…or at least partly assuaged. The trick would be to get control of US finances now and not spend so damned much money. We, The Mute On that note, the House of Representatives has just swung over to the Republicans, who are supposed to be the people who care about such things. The House of Representatives is also supposed to have the 'power of the purse;' it is supposed to represent 'The People' and make sure their money isn't wasted. You'd think the current Republicans would insist on waiting, rather than going along with another huge spendapalooza. After all, The People have spoken; shouldn't Congress listen to them before spending more money? Dream on! Instead, with the support of the Republicans, Congress has come up with the aforementioned $1.7 trillion spending extravaganza, Politico: The year-end spending package that Congress is rushing to pass this week does more than fund the government through September. It's also chock full of policy provisions that affect everything from the lobster industry to TikTok to professional sports. The $1.7 trillion government funding measure is the last major must-pass bill on the legislative docket before the start of the 118th Congress in January, when divided government and a looming 2024 presidential election will make legislating even harder than it currently is. That makes the spending bill a magnet for members trying to cram in their priorities just before the holidays.      Christmas Wishlist On 4,155 slimy pages you will find their 'priorities'; Representative Dan Bishop highlighted a few of them: $410 million to protect the borders – of Egypt, Tunisia, Jordan, Oman and Lebanon. Protect them from what? We don't know. $65 million to "restore Pacific salmon populations.' Heck, why not? $3.6 million to make a hiking trail named after Michelle Obama. Who could be against that? $200 million to promote 'gender equity and equality' with some of the funds 'made available for programs to promote democracy and for gender equality in Pakistan.   $3 million for an LGBTQ museum in New York…another essential project for a bankrupt government. Yes, the bill was all "christmas treed up." Good, bad…Santa didn't care. Here are some other gems from the Heritage Foundation: $477,000 for the Equity Institute in Rhode Island to indoctrinate teachers with "antiracism virtual labs."  $1 million for Zora's House in Ohio, a "coworking and community space" for "women and gender-expansive people of color."  $750,000 for "LGBT and Gender Non-Conforming housing" in Albany, N.Y.  $2 million for the "Great Blacks in Wax" museum in Baltimore.  $750,000 for the "TransLatin@ Coalition" to provide "workforce development programs and supportive services for Transgender and Gender nonconforming and Intersex (TGI) immigrant women in Los Angeles."  The bill affects all manner of commerce and social life in the USA. But not a single member of Congress will read it.   Were we a member of Congress, we wouldn't bother to read it either. What's the point? It's all giveaways, disguised as claptrap. But since we are enjoying a Fezziwigian glow of holiday cheer…and since this will be our last contact with you until after Christmas…rather than criticize, we will offer some constructive suggestions. How could the budget be cut and disaster avoided? (You may want to send this to your member of Congress to give him an opportunity to thank you, before tossing our recommendations into the wastebasket.) Modest Suggestions Were we, by some act of madness or imprudence, suddenly in charge of the US government, we would proceed quickly to eliminate our major problems, foreign and domestic. In less than 24 hours, inflation would disappear…the budget would be balanced, the Russians and Chinese would no longer be our mortal enemies…and Americans could go about their lives without the heavy hands of the feds holding them back. As for the 'foreign policy' issues – Russia, Ukraine, China…and other bugaboos – what business of ours is it whether Russia's frontier with the Ukraine runs along the Dnipro or the Sea of Azov? Ditto Taiwan. Not our problem. The US has spent billions of dollars promoting 'democracy,' or…sometimes…'dictatorship', depending on which way the wind is blowing. And what good has it done us? A lot of smart people have made their careers, their reputations and their fortunes meddling overseas, but 'The People' have gotten nothing from it…other than lost money, PTSDs and lost lives.   We would simply announce that we have no further interest in the matter, cut off all foreign aid, and bring back all US troops now dawdling in far-flung, godforsaken outposts.  We might, just for theatrical flourish and clarification, also send out a little note to foreign governments letting them know that we have renounced the whole 'empire' misadventure. No more sanctions. No more assassinations or coups. No more undeclared war. Our spooks would be recalled…tried for their crimes…fired or hung, as their cases warrant.   Most of our long-range airplanes and warships, having no further use, would be scrapped. The Pentagon budget would be reduced from $855 billion to an amount actually needed to defend the country from attack…perhaps $100 billion, maybe less. Turning to the homefront, the Fed would be immediately disbanded. Henceforth, if banks get into trouble – too bad for them. And buyers and sellers would figure out interest rates for themselves. Rates may be higher; they may be lower. But they would finally be honest. We would also return to a gold standard, fixing the price of the dollar at 1/1800th of an ounce. This would not be a perfect money system, nothing is. But it is the best we can think of. There would be no further fear of inflation…and no further instability caused by fake money or fake interest rates. So too, approximately 1,950 government agencies would be terminated. They come…but they don't go. This is our chance to 'drain the swamp,' and get rid of them. Only those performing vital functions would remain, if there are any. All "welfare" would cease. All grants for this or that…giveaways…subsidies…payoffs ….bribes… would end. Social security and medical care would have to continue; we get a generous check each month. But they would be cut back, curtailed…and gradually eliminated. In short, we would go back to the form of government foreseen and prescribed by the founding fathers – a small government with limited power and limited resources.   The savings, from cuts in military and domestic spending, would give the feds a surplus of at least $2 trillion + annually…which could be applied to paying off the national debt. Problem solved. Of course, we don't want to make light of the difficulty of going from here to there. The adjustments would be brutal for some – those accustomed to living off the hard work of others. For others, it would be seamless. And for all, it would be quick. All of a sudden, millions of people would have to get up off their fat duffs and get to work. The US economy would flower and bloom…driven by people who needed to provide goods or services to others. Almost everyone would be happier, as new inventions, new services, rediscovered freedom and cheaper products graced their lives. What are the odds that this could happen? Zero. But as Hemingway put it, 'wouldn't it be pretty to think so.' Merry Christmas. Happy Hanukkah. Enjoy the 'Dark Passage.' Or whatever.

Sell These 10 Stocks Before the New Year

I got this list from my friend and I think it may be useful for some folks who are either owning them or are thinking to buy them.

Try to stay away from them as far as possible!

Santa Claus has delivered gifts to me

While the market has got a wild rollercoasting gyration lately, we do get a mini Santa Claus coming today. Actually I have got quite a few gifts from Santa today, including very nice overnight gifts worth thousands of dollars. 

Thanks so much Santa Claus for being so nice to me!

Here are a few notes I sent to my Family this week, detailing my thought process in expecting Santa Claus to come.

Merry Christmas and Happy New Year!

 

 

 

Making money even when being wrong

I was totally wrong but it didn't mean I couldn't make some decent money while being wrong! That's the best scenario one can expect, right?

Last Friday after three days of hash selloff with many momentum indicators showing signs of an oversold condition, I thought there was a good possibility of a Monday rally. As such, I opened a few long positions. As always, in such a very unpredictable market, I often just use special strategies to minimize my risk but with a high profitable potential. Some are targeting an upside level towards the end of this week but I had two sets of bullish SPX put spreads, betting SPX would not decline below 3800/3795 even if we continued to see some selloffs on Monday. Well, I indeed got the Monday direction wrong. The market still got hammered quite hard most of the day. However it still managed to stay above 3800 at closing. Lucky me for being able to walk away with some good money while I was totally wrong about the overall market direction💪🤓

The Market God has repeatedly taught me a lesson: TA is more of an art than science. We can never fully rely on TA although it is very useful!

Having said that, yesterday's continuous selloff may have actually set the market up for a more decent Santa Claus rally towards the end of this week or even into next week, depending how strong the rally will be. Regardless, various TA indicators have shown good bullish signs at the moment for the near term. I think we will see SPX around 3900-3950 in the days ahead or even towards 4000ish if a stronger rally materializes. Don't get me wrong. We will see more severe declines after this rally is done.  Nevertheless I've become more bullish than bearish for the next few days at least! This is what I'm betting on🤗 

Fed Can’t Tell You The Truth

The Fed isn't that bad at forecasting. They just can't tell the truth.

Imagine that on Wednesday, the Fed released projections of a 2% economic decline next year. Immediately, the market would have sold off by 5%, and the media would run with the story causing consumption to contract, and, voila, you have a recession.

These forecasts are always overly optimistic and gradually reduce to align with economic realities. Such allows the market to adjust without creating a dislocation driven by panicked selling. The chart below shows the annual downward adjustments to the economic forecast each year.

‌‌We believe a recession seems highly probable if the Fed's end game of rate increases is higher unemployment and lower inflation. The only way to achieve that with rate increases is to destroy demand which ultimately slows wage growth. The economic data already seems well tilted into a recessionary trend. The composite economic index is already signaling a sharp slowdown in economic activity, and we suspect it will deepen next year.

As noted above, IF the economy slows markedly next year or falls into a recession, the market will need to reprice for lower earnings. Given the Fed is continuing to hike rates, that repricing seems inevitable as history shows that Fed rate hikes also align with peak earnings followed by contractions.

By Lance Roberts

A mini Santa is coming?

As said a couple of weeks ago we may not see Santa coming this year ( Will we see Santa this year?). So what is the status now about Santa?

Purely from the statistical perspective, the tendency is consistent that the last two weeks are generally more bullish than bearish. Here is the chart for Dec in average that we do see an uptrend for S&P. 

Here is the current S&P chart, which does not look really bullish for a strong Santa to come. As you can see, we still see a strong ongoing MACD sell signal (top pink box). And S&P has broken down from a  recent consolidation range (the lower pink box), which is TA wise quite bearish. Having said that, yesterday's second day decline since Powell's talk stopped just at its major support, the 50 DMA. and several short term indicators have already plunged into the oversold territory. With the seasonally bullish period come into play starting from next week, we may see some buying pressure in the next week or two. However, any attempt to bounce will likely more muted and short-live, as it has to overcome its strong overhead resistance not far away just above it. This tells me we could still see a min Santa Claus rally in the next two weeks but don't expect to be a strong rally and forget about FOMO, which will be especially risky for this year!I personally had placed some long positions yesterday in anticipating this rally but I won't be holding them for long. We will likely see a strong breakdown after this rally attempt, which may even trigger a run to a new low some time in the new year. Be very cautious now!!  

Humanity owes Elon Muskl a debt of gratitude

For his creating, against all odds, both Tesla (TSLA) and SpaceX.

I'd say also for his taking over Twitter, which will be transformed to be the only major media that allows for free speech and to create and share ideas and information instantly, without barriers. 

Making money in turmoil!

 The market is in turmoil but it doesn't mean we cannot make some money. Actually we managed to make some really great money this week:

And today turned out to be a ugly Friday. But I think there is a good chance we will see some rebound early next week. I'm ready to take more profits from such volatility

 

 

Who will benefit most from money printing?

 Investing legend Stanley Druckenmiller nailed it in early 2021 in this two-minute video. Here's the transcription of his wise words. 

The Left has always tried to label themselves to be ones to help the poors by taxing and printing money. But in the end, the poors become even poorer due to such irresponsible actions. I'd even think it is due to the selfishness of those at the top on the Left. After all, we all know they are the ones who are extremely rich and will benefit greatly from money-printing! 

But let's start with the Fed and inequality.

I don't think there has been any greater engine of inequality than the Federal Reserve Bank the last 11 years. So hearing the chairman talk about visiting homeless shelters is very, very rich indeed.

I just had the best year I've had in 15 years last year. Everyone wealthy I know is making a fortune. And why are we making it? Because this guy is printing money like there's no tomorrow.

And the kids in Harlem, in my opinion, are not benefiting from money printing, but Stan Druckenmiller and other wealthy people are.

So for the life of me, I can't figure out why the Left is so excited about money printing when all the data says the people who benefit from money printing are rich people who know how to navigate the markets.

The odds-on bet is we're gonna have inflation, and inflation is going to hurt poor people a lot more than rich people.

How does this thing end?

To me, the asset bubble, which he's blowing up into unbelievable proportions, busts before the inflation ever really manifests itself. That's what happened with the housing thing in '08 to '09. We never really got to the inflation because the asset bubble burst – not dissimilar to what happened in '29.

That's not my central case, but let me just say we've never had a deflationary bust because inflation was too close to zero or 1.5 [percent] instead of 2 [percent].

We've had them because we've had these tremendous asset bubbles. It happened here in '29, it happened to Japan in '90, and obviously it happened in the Great Financial Crisis.

And there is no one, no group, that will get hurt more by a bust than the poor. They will be first in line to get screwed. Trust me.

Where are we?

Bulls are resilient but the worst is yet to come....

First let me share a nice summary I just got from a friend about the key takeaways from today's Fed decision and Powell's press conference:

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The Fed does this Summary of Economic Projections ("SEP") once a quarter... This time around, the projections showed, on balance, that the central bank sees everything getting just a little bit worse over the next 12 months than what the Fed was projecting in September. Still, the central bank is planning to hike rates at least one more time after today.

While their expectations for real gross domestic product ("GDP") growth in 2022 grew from 0.2% to 0.5% and their unemployment projection remained about the same through year-end, the Fed members expect things to deteriorate next year...

They project a median real GDP growth of 0.5% next year compared with the 1.2% they thought in September. Their unemployment figure is a bit higher at 4.6% versus the 4.4% projection three months ago... an estimate that means 1.6 million Americans out of work.

Meanwhile, the Fed expects core inflation to be higher in 2023 – 3.5%, by its preferred measure – than it indicated before (3.1%).

That's not exactly a bullish picture. And yet the Fed says rates and the costs of doing business will keep going up...

Most Fed board members seem to see the benchmark fed-funds interest rate hit a minimum of 5% next year, then remain above 4% in 2024 and above 3% in 2025.

And they don't see the core personal consumption expenditures ("PCE") index of inflation getting below 3% until 2024 or close to 2% until 2025, despite inflation coming down from its peak in the summer. As Powell said...

We made less progress than expected on inflation. That's why unemployment goes up because we're having to tighten policy more... That's the idea: slower progress on inflation, tighter policy, probably higher rates, probably held for longer just to get to where you need to get inflation down to 2%.

Yet on the other hand, in its written statement announcing its policy moves today, the Fed said...

The Committee is strongly committed to returning inflation to its 2 percent objective.

It doesn't add up, or maybe it does. Fed members are committed to an economy with 2% inflation, but they're not expecting it to happen anytime soon – and certainly not next year while unemployment rises and growth slows. It's right there, written out for anyone to see.

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Here is what shared with my DW Family about a low risk trade with a 1:7 risk reward ratio today:

The SPX TA trend looks quite bearish at the moment but we are in the seasonally bullish period and bulls are fighting for the Santa Claus rally. So it is not advisable to bet heavily on either side. Low risk trades are the best way to go for now!💪✌

The bears are in line for Christmas......

First, the S&P 500 hits 200-day MA, tests, turns lower...

Next, LQD (corporate bonds) hits 200-day MA, tests, turns lower...

And finally, TLT (long-term government bonds) hits 100-day MA, tests, turns lower... 

Three bearish charts, just in time for Christmas. Ho, ho… hum.

Who will win in the bear market: bear or bull?

Share an interesting writeup about bulls vs bears in a bear market. 🤓

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However, the reality is quite different: Bullish and bearish investors both tend to lose money in bear markets.

The reason is volatility.

Stocks typically experience sharper and more frequent swings – up and down – in bear markets than in bull markets. In fact, history's largest single-day gains and single-day declines have all occurred in bear markets.

These moves are remarkably efficient at getting most investors to do exactly the wrong thing at the wrong time.

The big rallies convince most folks that the worst is over and a new bull market is underway. Bearish investors "throw in the towel" and cover their short positions, while bullish investors succumb to fear of missing out (FOMO) and rush back into stocks, just before the next decline begins.

Likewise, the big declines often convince most bullish investors to panic and sell – and most bearish investors to "double down" on their short positions – just before another sharp rally begins.

These cycles can play out again and again before the bear market finally ends, creating uncertainty – and significant losses – for bullish and bearish investors alike.

If you hope to profit from these moves, you must be willing to be a "contrarian" and take profits quickly. That means buying when stocks are oversold and most investors are fearful, and selling when stocks are overbought and most investors are greedy.

But even then, you'll need plenty of emotional discipline – and probably a little luck – to be successful.

A Fed pivot may trigger another market run....to the downside!

I'm sure a lot of people are eagerly expecting the Fed will pivote soon and it is a common thought an interest rate pivot will boost the stock market. Really? See below what the market will really perform when the Fed pivots. It is not a pretty picture based on past experience. 

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But pivots don't always end well…

It's actually been quite the opposite when you look at the last two major bear markets with the 2000 "dot-com" bust and 2008/2009 financial crisis.

The chart below shows the overnight federal funds rate (orange line) and the S&P 500 (blue line). The Fed pivot took place before stocks took their biggest plunge (grey dotted line).

Take a look…

 

That's because a pivot signals tough times ahead for the economy, and thus corporate profits.

And pivoting is historically a bad signal because it follows the stark realization by Fed officials that they've pushed things too far and took the economy to the brink.

But by then, it's too late.

Take another look at the federal funds rates in the chart below, this time with recessions shown in the grey shaded areas. Pivots happened before the last three recessions hit…

 

That means pivoting is a sign the Fed has gone too far in their battle against inflation – and is doing serious damage to the economy…

By the time the Fed realizes it's making a mistake, it's already too late for the economy and corporate earnings. And that's why you see further pressure on stock prices.

 So don't take a Fed pivot as an all-clear signal. Rather, it's a sign this bear market has room to run.

A dire prospect is ahead of us.....

Wall Street chorus grows louder, warning that 2023 will be ugly – Bloomberg . From Goldman Sachs Group CEO David Solomon's caution that the economy faces "bumpy times ahead," to JPMorgan Chase CEO Jamie Dimon's grimmer view that this would be a "mild to hard recession," and Morgan Stanley Wealth Management's Lisa Shalett, who told Bloomberg Television that corporations are facing a "rude awakening" on earnings, the messages have become increasingly dire.

This is consistent with what the TA trending is suggesting that we will likely see more pains in the months ahead before we finally see the bottom of the bear market. So don't FOMO in the near future, which is the best advice I can offer at the moment!

Inflation has peaked!

As we all know, inflation has been the No. One market risk for this year and it continues to be THE major concern for nearly everyone in the market! So the direction of inflation is paramountly important for the overall market direction in the months ahead. Here is what I think: based on the very long term trend of inflation, it seems to me that inflation has peaked by now and the next major direction for it is down. 

 Here's a chart of the year-over-year ("YOY") change of consumer price index ("CPI")… this data goes back more than 100 years to 1914.

As you can see by the simple trendlines, inflation has hit its upper band of the long term channel and is heading down. Given this is a century long trend, this resistance is really a major one to overcome and I don't think it can and will. As such, here is my bold call: INFLATION HAS PEAKED NOW!

Having said that, let me be clear: this does not mean the market has necessarily bottomed by now. We may very well continue to see volatility for a while with the market hitting its final bottom in a few months time. There is still a good probability that we may see a 10-20% plunge before we can finally claim the bottom of this bear market!

Ominous signs

 

Further to what I shared Friday,  Let me share more warning signs.

Here are the two charts, which makes the market in a rather precarious situation, vulnerable to a sudden waterfall type of plunge at any moment.  

And then here is another bearish setup for S&P, which could lead to a 20% crash from the current level, if the pattern plays out as it is showing. This means it is not out of norm for S&P moves down towards the 3300 level in the weeks ahead. Is there any certainty for that? Definitely not but it is a good probability based on the bearish TA setup.

 

Don't tell me you are not warned, if you have the habit of chasing or FOMO!  

 

Don't tell me you are not warned, if you have the habit of chasing or FOMO!