Update on Your 2022 Bear Market Playbook Featuring Meltdowns to SP 3000 and Nasdaq 100 9000
Hey Subscriber,
Well, friends-- our 2022 bear market and early 2023 recession forecasts are coming to reality faster than even I imagined...and we have been major bearish on the overall market ex-the REXIT trade since March.
As I informed and advised you all on Monday this week (why does that seem a month ago?) with the negative 2.3% GDP print for Q1 2022 and the Atlanta real-time Q2 2022 GDP indicator at ZERO GDP growth (and when the negative Philly Fed manufacturing numbers + 75bps Fed Fund rise +negative home building permits+ 6.35% mortgage rise from 1.56% in Jan) . . .
. . . the Atlanta GDP Now index update on June 27th will corroborate our Transformity Research MacroMarket Index now 15% UNDER our 15 level recession in the next 6 months indicator
In short, we already HAVE 2 quarters in a row negative GDP economy which is the classic definition of a bear market. And we have enough fear in the market to have a classic rip-your-face-off bear market rally with literally ANY positive macroeconomic news to hit the market (say the June CPI print is down below 8%--which I do not think has a chance FYI--would be a rip-your-face off bear market rally. ).
Here is the record high of Extreme Fear in the market today:
Note: one of the many parts of a major recession and Fed-based bear market is underestimating the speed of the FEXIT wealth destruction tactics. Don't forget--when you add up all the investor/speculator money that has gone to money heaven in the last 6 months ($2 trillion of crypto value blown up/$4 trillion of retirement money and soon $10 trillion+ of home equity with 6% mortgage rates going to 8%) that means $16 trillion of personal household wealth has literally disappeared from the US economic system and gone to money heaven.
I don't know about you-- but most people when they see their retirement fund down 30%+, they hunker down a bit on discretionary spending. Same for the 45 million Yolo FOMO cell phone speculators--most have already puked and wish they never saw Matt Damon's TV ads that claimed: "Fortune Favors the Brave."
REALITY: The NEGATIVE wealth effect in the financial asset markets has tightened financial conditions by more than 20% in less than one month! That means a cascade of hedge funds getting liquidated because they were leveraged going into June.
NOW look at the negative GDP multiplier events that are hitting the US Economy. The 30% of GDP which is housing/commercial building/auto manufacturing has the strongest GDP multiplier effects (i.e., when you buy a new home all the construction costs have a GDP multiplier effect--labor spends the wages/housing product companies pay wages and buy stuff--you buy new appliances and house stuff).
It's the same when you buy a new American-built vehicle.
But now the latest consumer sentiment and inflation expectations say the VAST majority of consumers feel like the recession has started. And we are in a recession already based on the data below.
So the negative GDP multiplier effect/positive spending on durables feedback loop--is now a negative GDP feedback loop. On top of everything else:
1) The bottom 60% of households ranked by income have stopped most discretionary spending.
2) We have a BUST in durables spending—on the margin no one is buying more stuff
3) 6% mortgage rates have new housing starts down 14%
4) The Philly Fed manufacturing index is negative for the last three months
Key Point: As my old buddy Josh Downtown Brown accurately pointed out today on CNBC--the major market-cap-weighted indexes are dominated by companies that make STUFF. Service companies ex-healthcare are a very small part of the SP 500. Travel is a TINY part of the SP 500.
Thus--the equity market value destruction feedback loop has legs into October:
#1 9% earnings growth estimates for the SP 500 in 2022 are out the window.
#2 When we get into earnings season for Q2, we are going to be deluged with EPS downgrades like Adobe last night.
#3 Thus forward EPS guidance for Q3 and 4 HAS TO go lower and analysts HAVE to take down those future earnings models and NOW discount them to present value with 12X HIGHER discount rate (5 or 10-year treasury bond rates).
Really key point: What the stock market did this is wake up to the facts we have unambiguously stated since April:
1) A soft landing (as we have shared since April) is mathematically impossible--and a complete sham
2) In fact that the US economy has already rolled over in the last 4 months and is in recession NOW.
They now understand that JayPow had boxed himself in and HAD TO SHIV the US stock market this week with one of at least three 75 basis point Fed Fund hikes (75bps now forecast for July and September in Fed futures . . .
. . . yet we are STILL (from both a valuation and historical basis) far away from an SP 500 and Nasdaq 100 bottom given the $6 trillion of Fed balance sheet has to get sold off every month at $100 billion a month AND Fed Funds rates are now set to be raised 20X higher (2 orders of magnitude for you calculus geeks)
Based on new macro data, our new SP 500 bottom range is 3000--about 20% lower than today's close.
Our bear market playbook says
1) SELL OUR REXIT-related stocks--the "last man standing" in the orgy of bear market liquidations--which should be a big buy again as they settle down to their 50-week support
2) The rest of the market measured by SP gets hammered to 3000
3) And THEN the capitulation PUKE takes the index lower as an overshoot
Why? Again because the overall stock market (as measured by the SP 500) and the Big Tech Nasdaq 100 index as valued by the CAPE Shiller stock valuation index STILL have a lot farther to go down in value (for a number of critical reasons I will address in a moment--here again is my brainy friend Lynn Alden to explain Cape Shiller Index ).
IN recession-based bear markets, the SP 500 goes down 32% on average. BUT there has never been a recession-led bear market during the 12-year ERA of ZRIP and $6 trillion of Federal Reserve monetary stimulus aka QE.
Thus all the old data does not count in this NEW monetary policy era. In fact, really only the early and the late 70's early 80's 8% inflation and the Volker Fed response are analogous. When Fed Chair Paul Volker raised Fed Funds rates to nearly 20% in 1981, we got 11% unemployment as a result...but his policy broke the back of inflation for 40 years.
Note: With 11 million jobs for 5 million job hunters--we could destroy 6 MILLION jobs with uber-high Fed Funds rates and STILL BE at under 4% unemployment thus meeting the Feds' Congressional mandate to
1) Reach maximum employment and 2) Control price stability.
Here again our suggested portfolio management and profit protection
Key point: I 100% guarantee we WILL have massive 10%+ melt-up bear market rallies with just a HINT of good economic news--USE THEM to build cash--cash IS A STRATEGY in bear markets!
1) We are Lowering REXIT Buy Unders on Ultra Income+ Growth to 100-WEEK SMA not DAILY SMA!
Here is why. When I went back to reread my trading journal from 2001 (you mean you DON'T have a trading journal??? Time to start one TODAY!) it showed that we had better results on timing new purchases of energy stocks in the pathway of the Dot Com bubble meltdown when we went with longer weekly duration charts--50 week/100 week/200 weeks. For example, here is the $XOP weekly chart:
It tells me in an overall bear market for stocks, I want to set my Buy Under prices for REXIT beneficiary stocks close to the 50 WEEK moving average than the 20-week moving average.
Key Point: We advised you on Monday to go FULL REXIT PROFIT PROTECTION Tightening Ultra Income + Growth Sell Stops to 8% UNDER today's closing prices and $XOP to 8% under closing prices
Well, needless to say, EVERYONE of our Ultra Income+ Growth REXIT beneficiary stock sell stops got hit on the 14th-- and we are literally out of EVERY Ultra Income position and the $XOP on the Ultra Growth side up about 67% on the portfolio versus QQQ down 35% and SPY down 24%. Greg will update the portfolios and buy under for re-entry.
Note: I am sure many of you who are capital gains shy sold call options against your positions or are just holding on for dear life. As you know, I do not manage money or provide buy/hold/sell advice to "hold on for dear life."
Here is how I run my money and for those who engage us to manage other people's money (OPM) with the following rules:
1) Be PRUDENT and cautious with my money--I worked a long time to earn it
2) Be BRAVE when bear markets get WAY oversold and the Fed signals they will stop raising rates (as measured by WEEKLY price moving averages like 2020).
KEY POINT: In the end, the Fed-induced bear markets end when the Fed ENDS RASING Fed Funds rates. Now since the Fed has at least July and September to see if another 1.5% of rate hike smothers the US economy (which is likely since, as mentioned, the US economy has ALREADY been smothered!) we can forecast September as the first pause of rates hikes.
3) PROTECT MY PROFITS when you forecast a bear market--let the MARKET take me out of winning positions with strategic sell stops
4) I am willing to risk a 20% decline of my profitable positions in normal bull market corrections (for instance, we took 300% profits out of the $USAC position and have sold in the money-covered call options that would take us out with another 55% profits) and still have half the original $5.25 $USAC position paying $2.05 a year in dividends!
5) BUT if it is YOUR judgment that the 12-year Fed-fuelled bull market 2010-2022 has run its amazing course and is running on empty, PROTECT AND TAKE MY PROFITS and I will worry about the capital gains taxes ok?
REALLY Key Point: I STRONGLY advise you to take enough profits on your TR positions to get at least a 200% return on your risk capital and HEDGE the rest with October out of the money XOP and QQQ put options
On Monday the 13th we also
3) Advised you to SELL $EURN, $PFFL $HCDIP
4) We advised you to SELL/Clean Out Any Remaining Ultra Growth Positions You Still Hold for tax harvesting
5) We advised you to SELL in the money July Call options on the HUGE dividend UI+Growth Positions we Bought in April/May/June 2020 (if you want to learn how we do this, click here to join us in the All-Access trading room and we will show you how!
NOTE: All of those call options are going to expire worthless-- and for our managed account clients that single trade was like $500,000 of FREE MONEY!
Here are the links explaining our path to our bear market forecast to click again:
1) TR's 2023 Recession Base Case: Why The Fed's "Immaculate Monetary Tightening" aka Soft Landing Narrative Is Mathematically Impossible
2) TR's 2022 $SP 500 DOWN 35%-40%/Nasdaq100 DOWN 50%+ Bear Market Case: Why The 2002-2023 Bear Market for > 16+ P/E Stocks Is a 100% Certainty
3) I wrote in our June 3 update that "BEAR MARKET prudence has us NOT ADDING ANY more REXIT sectors and stocks UNTIL we get the highly predictable 10-20% pullback in prices since REXIT stocks were quite literally the ONLY stocks making big juicy 50%+ profits this year and will sell-off from profit survival selling as the bear market starts to really hurt.
Here is the list of REXIT stocks on the "bench" waiting for that 10-20% PROFIT TAKING pull back that comes 100% of the time in SP 500/QQQ bear markets as institutional investors--especially algorithm black box positive price momentum factor hedge funds who ONLY buy stocks that are outperforming and then SELL them when the break 20 day moving averages--
Then read (or reread for some of you) the great value investor Howard Marks of Oak Tree Capital on why the only certainty in the stock market is the hard-wired human investing psychology: greed/fear of missing out on easy profits and fear of losing money.
Final Point: As mentioned several times, Bear Markets end with a major crescendo of infectious investor selling--commonly called the "Puke Point" and the complete emotional reverse of YOLO FOMO mania. The puke point is where MILLIONS of investors call their broker (or get into their online accounts") and sells EVERYTHING regardless of price or sector.
At our shop, this reflexive "GMTFO NOW" moment has not recently occurred since we went to cash in Feb 2020 and have now taken $ million in profits in 2022 and sit at 85% ish in cash at present.
Final point: If you missed our Howard Marks missive on investor psychology, make sure to click this link here for Howard's critically important knowledge of bull and bear market investor psychology that I send to EVERY managed account client and discuss deeply. Final note. It is critically important for you to understand and control your emotions as this bear market shit show gathers steam.
And in a bear market, it is NEVER WRONG to take a profit and hold a TON of cash so you can take advantage of ANOTHER generational buying opportunity as we did in the first week of April 2020.
Toby
PS--IF you want to TRADE this insane volatility click here, scroll down to the bottom of the registration page and join us in the All Access trading room for some historic profit opportunities.
PSS--Here is the Market Murderers Row of the Gale Force Headwinds for Stocks this summer as we patiently wait for the final market PUKE:
The US and Global EPS headwinds are pretty stunning when you add them all up
1) US recession is already here
2) Global recessions are here ex-China if they EVER actually re-open
3) 250% higher cost of the capital-using prime rate
4) Salary and Wage spiral until
5) Layoffs start to bite in ALL the industries that OVER hired into the pandemic
6) General recession cost-cutting and lower UNIT sales volumes from HIGHer prices = LOWer margins
7) Historically high $dollar vs. Yen and EU and pound makes US exports cost more
8) Repatriating foreign currency sales into $dollar cuts the gross margins
9) Durable goods sales fall as life essentials costs rise
10) Bottom 60% of US households ie <$65k gross income and 40% of households that do not own their home have no savings to fall back on and are now putting essential spending on credit cards
11) 2 months of Leading GDP Indicators down another 0.4%
12) $16 TRILLION of wealth has now gone to money heaven (stocks, bonds, crypto and equity lost in homes purchased in the last 24 months)
13) The endless Ukraine war
14) The upcoming Q3 Negative Earnings Revisions and Lower Price Targets
15) Over 7% CPI prints through the summer because the big factors are not going appreciably lower
NET NET the path of least resistance is DOWN for overall market indexes UNTIL FED STOPS HIKING RATES with rip-your-face-off short-covering rallies
NOW is the time to build the 1) "What secular growth companies would I LOVE to own at a reasonable valuation multiple and 2) patiently wait for 100-week price levels where REXIT sectors and stocks are attractive.