Stock Market Trending Short-Term Bearish now

Last week in my note I asked the question whether we had seen the bottom in the stock market. Specifically looking at the SPY, I can see I know the answer now. And it is no. We made a new low on Friday.

Here is the SPY daily chart:

We also can see that the head-and-shoulders pattern got confirmed on Friday. I measured the distance from the top to the neckline of the pattern and duplicated it to show that the target pullback is to around the 560 - 561 area.

There is also support at around the 565 - 566 area. That would be the next level to watch. We are currently at around the 580 area. So, going down to the first support area is about -2.6% below current levels.

Now I will go over the other side and why I do not think this is the start of a big bear market. Note that I am not a perma bull and that is part of the reason I call myself the alternate trader. Trend followers need to keep an objective mind about markets and trade in the direction of the markets.

Having said that, we know that markets go up most of the time (think I read it is 70% of the time). We have always had short-term bear periods within bull markets as we have witnessed over the last 2 years.

Sentiment is one thing. However, markets eventually focus on what matters. And that is earnings growth. We have the Q4 earnings coming up and that could be the catalyst that reassures markets about the trajectory of earnings growth.

We also know that interest rates and inflation have a strong bearing on earnings. Earnings get a boost if interest rates come down. And interest rates can come down if inflation comes down.

Interest rates have come down over the last several months from their peak. The Fed has reduced the rates because they have seen that inflation has come down. Now there is a threat that inflation could be going back up and so the market is nervous that interest rates may stay where they are.

Certainly, the expectation was that interest rates will keep coming down and normalize at a much lower level than current levels. But, if inflation starts to go back up, then the markets (rightfully) think that the Fed will not reduce interest rates as expected.

There is a CPI number awaited on Wednesday and that will give the first indication whether inflation is indeed going back up. The earnings will also start indicating whether the companies meet their Q4 expectations but also give strong guidance for future earnings.

One thing that makes me optimistic about company earnings is that they have managed the higher interest rates and inflation very well so far, these last 2 years. That makes me think that companies have figured out how to run their business under adverse interest rate and inflation conditions.

All that to say that we may be surprised by the company’s resilience when it comes to delivering earnings growth. That is my bull case and my premise why we will not get into a prolonged bear market. Yet.