As brutal as the market has been so far in 2022 … it’s likely to get a lot worse. Because? As the second quarter earnings season is about to begin and early indications point to a worsening of results that is likely to increase stock market sales (SPY). This is not a problem for those who are trading this bear market properly. If you’re not sure what to do, keep reading this vital commentary that gives you a timely view of the market and a bearish trading plan.
(Please enjoy this updated version of my weekly commentary on the Reitmeister Total Return newsletter).
In recent comments we have addressed why it is a bear market. And the less they should stock up. Even the reasons behind the tortuous path to follow to find bottom.
This last part is interesting as we move into the second quarter earnings season. During bullish times, these reports often provide the catalyst for the next higher stretch.
Unfortunately, this time it can do exactly the opposite, as Wall Street has been slow to acknowledge the recession. Therefore, if a higher-than-usual percentage of companies show weak results and a lower orientation for the future, this will give investors many reasons to push the sell button once again and push stocks to new lows.
We talked about this and our trading plan in this week’s market comment …
Earnings season is always important. But this time it takes on special significance, as investors are concerned that recent economic weakness will appear in these reports. If true, prepare for the next lower stage as the reports are released in July.
As noted last week, the average recession leads to a 26% reduction in earnings per share for S&P 500 (SPY) companies. This is a big part of why stock prices are going down. Part of that is already reflected in current sales in anticipation of this move … but certainly not all.
Let me repeat some of last week’s math so you can learn why ratings will be too high once revisions are made and why they point to more disadvantages.
“We’re going to break down this part because it’s not intuitive on the surface. Right now, Wall Street analysts are still predicting $ 231 in earnings per share for the S&P 500 (SPY). At the current price level of 3,821, that’s equivalent to a PE of 16.4.
Yes, this is more reasonable than the maximum of 21.4 PE for the shares in January. But it is still above the historical average of 15.5. And stocks usually go well below the historical average in the final stages of the bear market cycle before the next bullish one appears. Thus, even without any near-term reduction in earnings estimates, stocks are still too high to fund.
Now, let’s say Wall Street analysts finally get the note that this is in fact an approaching recession and begin the process of lowering future earnings estimates. Well, the average recession comes with a 26% reduction in earnings prospects. I guess this one will be on the softer side. So let’s go with a 20% reduction.
That would reduce estimates from the current one to $ 231 to just $ 185. Given today’s closing price, the EP would rise again to 20.7.
Your eyes do not deceive you. Basically, valuations will have returned almost to the starting line, like when we were at peak levels, forcing investors to lower prices to get the EP more online. ”
This brings us back to the notion of how far stocks should go to properly extract overvaluation to attract investors back for the next bullish race?
Earlier, I predicted that the bottom of this bear market will be slightly more than the average drop of 34%. Maybe 40%. Not because I’m expecting a worse-than-normal recession. Rather it is because valuations were higher than normal in the low rate environment and the excess needs to be eliminated.
Another way of saying this is to say that everyone got drunk with stocks during the last bullish market party. And now we’re dealing with the day after the hangover.
3,180 = 34% decrease from the previous peak of 4,818
3,000 = 37.7% drop and interesting resistance point for stocks to fight.
2,891 = 40% decrease
Now let’s square these previous predictions of where stocks are headed with the history of declining earnings valuation.
I suspect the stock will have to reach around 15-16X the reduced earnings estimates of $ 185. This creates a fair value range from 2,775 to 2,960. This prediction aligns very well with what I shared earlier.
We now have two different ways of seeing where the bear market should be and they line up pretty well. But here’s the sad part. As much as we want the market to act in a logical order..WILL NOT BE!
This means that just because we have made logical predictions of where the actions might go … there is nothing written in stone that develops in this way. Therefore, it requires a more flexible strategy of when to make a profit and when to start shopping for the next bullfight.
My view is that we should start profiting from our short positions around the 34% drop level (3,180). Especially the higher beta short positions. Maybe even a touch before.
Since I feel like there will be a long battle of over 3,000, and in fact it could be the bottom, then start going back to a covered portfolio balancing our short positions fishing from the bottom in some stocks that should shoot in the early stages of the next bullish market. Like cyclical stocks (energy, chemicals, materials, etc.).
Yes, we’re a little ahead of ourselves, but it’s good to have a plan to find out why stocks are likely to go down. And so, when we start to take the profits from our short stocks off the board and move to the offensive mode for the resurgence of the bullish market.
For now, with a closing price of 3,831 today … there are likely to be more downsides. And yes, a broad weakness in this quarter’s earnings reports would certainly be a logical catalyst to get us moving down to test these lower levels.
Our portfolio with 4 different reverse ETF positions is well positioned to benefit from this environment. The same goes for our 2 operations with higher rates that today have also ended up in the most column.
Since the beginning of June, this plan has worked wonders for us, as we have enjoyed a good gain while the S&P 500 has fallen by -7.28%. So you can imagine how much more impressive it will be if we have another 10-20% more downside until we find the bottom of the bear market.
What to do next?
Right now, there are 6 positions in my hand-selected portfolio that will not only protect you from a nearby bear market, but will also lead to big gains as stocks go down.
Like the wide gain our members enjoyed in June, when the market finally fell into bearish territory.
This unique strategy fits perfectly with the mission of my Reitmeister Total Return service. This is to provide positive returns …even in front of a roaring bear market.
Come find out what my 40 years of investment experience can do for you.
Also, have access to my full portfolio of 6 timely trades to not only survive … but thrive in this brutal bear market environment.
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I wish you a world of investment success!
Steve Reitmeister… but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and editor, Reitmeister Total Return
Shares of SPY fell $ 0.25 (-0.07%) in out-of-hours trading on Tuesday. To date, SPY has fallen -18.98%, compared to a% increase in the S&P 500 benchmark index over the same period.
About the author: Steve Reitmeister
Steve is best known to the StockNews audience as “Reity.” Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his latest articles and stock choices.
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