Battle for the Soul of the Stock Market is at Hand

The battle for the soul of the stock market (SPY) is at stake in March. Why is that? What are the key events? And are bulls or bears more like to win? 40 year investment pro Steve Reitmeister answers all that along with his trading plan and top picks. Read on below for the full story.

Stocks reached the lowest end of the current range at 3,940 (200 day moving average), with some attempts to break. The session was dominated by Thursday, when stocks traded below the line for most of it. The session ended with plenty of support and a huge up day on Friday.

What does it all mean?

That bulls and bears are pretty evenly matched these days which keeps us stuck in a trading. The more meaningful question is WHEN do we break out of the range and WHAT will be the catalyst?

We will focus our time today on answering those questions and getting our portfolios ready to profitably trade the outcome.

Let's start off with a 1 year chart of the S&P 500 (SPY) to appreciate how significant the 200 day moving average has been in framing activity.

Yes, the majority of time has been spent below the key long-term trend line in bearish territory. You can see, however, that it has been more than 4 months since the lows were made and that it has taken 2 months to break above this key level.

People who believe in price action's virtue would argue that the bulls are the better at this moment.

It is possible to discredit this theory by looking at all of the magnificent bear market rallies that occurred in the past, before the market crashed again. The most notable example would be the rally of more than 20% that was officially called a bull market in 2008, before falling to much lower levels in the first quarter 2009.

And just for good measure, please check out how the same thing happened in late 2002 before early 2003 brought a painful conclusion to that three year bear market.

The point is that the battle for the soul of the market is still before us. And quite possibly that battle is finalized in March as we hit these key dates with market moving events:

3/10 Government Employment Situation. Keep a close eye on the wage inflation data that was far too hot in the February report which started the recent downturn.

3/14 Consumer Price Index. The key is the month-over-month pace to determine if we are heating like the February report...or cooling like the previous months.

3/15 Producer Price Index. (PPI). Insiders believe this index is more important than CPI, as the prices paid today end up in the final products and services of the coming months. Future CPI will be determined by current PPI.

The issue is not whether or not the Fed sounds more Hawkish than it did at the February meeting.

When I look at these events, along with recent data that foreshadows what they may tell us, plus recent statements by Fed officials...I cannot help but to continue to be bearish in my market outlook.

Why?

Because of the following equation I have shared before, but deserves repeating:

Higher Rates (5%+)

Higher Rates in Place til at Least End of 2023

Economic impact lags for 6-12 months

Already weak economic readings

=

Fertile soil can cause recession and therefore extension of the bear markets with lower lows.

This is the same reason why David Einhorn, a well-known hedge fund manager, was recently recorded for the following:

I wouldn't pay any attention to price action within the range until the Government Employment Report is published on 3/10. It's just noise.

These catalysts will become live grenades and be thrown into market chaos from that point onwards. I believe we will see either bears or bulls emerge victorious from the range once the smoke clears.

Given the current facts, I would place a bet that the bears will win the victory parade. It is important to be open to new evidence as it comes in. If I were truly bullish, I would happily shed my bear skin and fly the bullish flag proudly.

A word of caution: Bulls could become irrationally excited reading too much into the first few events. This could lead to a screeching stop when the Fed takes the mic on 3-22.

Investors should be cautious about anything that resembles recent speeches stating that rates will rise above 5% and remain in place until year end. This should stop them from getting ahead.

Keep your eyes open to new facts as they arise. Realize that the scales are currently tilted in favor of the bear.

What To Do Next?

Find my new stock trading plan for 2023.

Plus, Much More

Steve Reitmeister …but everyone calls me Reity (pronounced "Righty")
CEO, StockNews.com

SPY shares were unchanged in after-hours trading Friday. Year-to-date, SPY has gained 5.69%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Reitmeister

StockNews readers know Steve as "Reity" He is the CEO of the company and shares his 40-years of investment experience with the Reitmeister Total return portfolio. Find out more about Reity, including links to his most recent articles as well as stock picks.