As I’ve mentioned the last couple of weeks, the market was due for a bounce, and it could extend up another 5% or so (the S&P is around 3800 right now and I think it could hit 4000).  With that said, I don’t believe the correction is over and I fear that the next leg lower could be painful.  (would a 15 to 20% swoosh lower cause some fear?)

I hope I’m wrong.  In the investment business you have to be optimistic by nature, but you need to be a realist to survive.  For that reason I’m making plans for client accounts if things transpire the way I’m thinking.  That means reducing risk or hedging into this bear market rally in the near future.

In my experience with corrective bear markets, you need a capitulation move that elicits outright fear and panic to end the bear.  I just don’t think we have seen that yet.  Could the markets be bottoming here and start a new bull run higher, absolutely. It’s definitely possible but in my opinion not very probable at this time. I’m leaning toward this being a bear market rally to shake out all the bears and get the bulls excited, only to crush both of them.

With that said, the next drop (if it does occur) should set things up for a new bull run in 2023, but will probably wash a lot of folks out so that they don’t participate.  They will sell low and then wait until it feels better to get back in, which means they will be buying back much too late.  In fact it would not surprise me to see the Fed start reducing interest rates next year to try and rally things.

Of course this is all speculation on my part.   I could of course change my outlook and flip back bullish if the market acts better than I anticipate, however I think it is prudent to take profits on positions we bought when the S&P was below 3700 as it now grinds higher especially if it hits my target of 4000.  Sitting heavy in cash will then give us a clear headed opportunity to assess the market and figure out next steps.  As a wise man once said, “it is better to be out of the market wishing you were in than being in the market and wishing you were out.”

A lot of news related events will happen the next few weeks, the Fed meets next Wednesday Nov 2nd and is expected to hike .75% followed by elections the following week.  I don’t know if one of these could be the catalyst or if something completely different could happen later on, but I’d really like to err on the side of caution and be building a lot of cash in the coming weeks.

Again, I hope I’m wrong.  Luckily I do have the ability to reassess and deploy capital at a moment’s notice if I am wrong, but something is keeping me awake at night with this market and I’m willing to take some heat for being overly conservative in the coming month until I see a better risk/reward setup for clients.