From 'Buy the Dip' to 'Sell the Rip'

Another big week for U.S. stocks... A reminder about bear market rallies... From 'buy the dip' to 'sell the rip'... Handicapping earnings, the Fed, and recession high jinks... Video: Doc joins Matt McCall's podcast...

Another 'inflection point' for U.S. stocks is here...

If you are at all interested in tracking the market's short-term moves, this would not be the best week to take a vacation or otherwise go off the grid with nothing but a tent and some sunscreen.

This week...

1. Roughly 170 companies from the S&P 500 Index report their latest financials, including big tech companies Alphabet (GOOGL) and Microsoft (MSFT) tomorrow... Meta Platforms (META) on Wednesday... and Apple (AAPL) and Amazon (AMZN) on Thursday.

2. The Federal Reserve meets again over two days and will announce its latest monetary policy move on Wednesday. Most notably, pro traders are expecting interest rates to go up by another 75 basis points. Anything else would be a surprise.

3. On Thursday, we'll also learn second-quarter U.S. gross domestic product ("GDP"), which we expect to show shrinkage for the second consecutive quarter – good enough for many people to call an official recession.

This is all to say that come Friday, we should have a better read on the outlook for businesses and the economy moving ahead in this unusually high inflation era... and we'll see what investors and traders do in response to the new information.

Will it be "not as bad as we thought" or "worse than we expected"? I (Corey McLaughlin) can't say for sure... But either way, this week is shaping up to be another big "inflection point" in the markets.

That's the word from our colleague and Ten Stock Trader editor Greg Diamond...

Based on Greg's technical analysis work and these events I just mentioned, he wrote this morning in his regular Weekly Market Outlook to paid subscribers...

Given the big tech earnings, Federal Reserve meeting, important economic data, and various technical factors coming up, which I've highlighted over the past month, we should get one of two scenarios [this week]...

The first is a breakout. Stocks made their bottom back in mid-June and this strength continues now. The second is a breakdown based on fear... stocks making new lows and some diverging to make higher lows.

Now, if you've followed along with us for most of this year, you might be saying, "A breakout? I thought we were in a bear market?"

Yes, we are. Don't forget it.

But as I'll explain, that's exactly why rallies can happen... and why we've recently seen one.

Remember, stocks can rise (for a bit) in a bear market...

In the context of a bear market, history has shown us some of the strongest short-term rallies ever happen within a longer-term downward trend. It's just that history books don't often talk about these "bear market rallies"...

The bear market's total return is what sticks in your memory and most people's portfolios.

You don't sit back, sip an iced tea on a summer day, and fondly reflect on that time the Nasdaq rallied 43% in April and May 2001 (including a 9% jump in one day)... You remember the 78% loss in the benchmark S&P 500 from the dot-com bubble peak in March 2000 to its ultimate bottom in October 2002.

This could happen again...

We haven't gone with the crowd this year... and we're not about to start succumbing to peer pressure now. We're at a point in the markets where a short-term rally in stocks would come as no surprise... especially if this week's key numbers are not as bad as they could be.

But this doesn't mean the bottom is in.

Dan said it really well in his latest Friday Digest – a bear market won't end because the mainstream media is saying it will, which is what we're hearing today. In fact, that's a fairly good signal that the downward trend is not over.

This may be a confusing time to be in the markets, but that's why we keep urging you to clear things up by thinking differently. Look at what's really happening... and evaluate what history tells us about what's likely (or unlikely) to happen next.

Our colleague Chris Igou did this in today's edition of DailyWealth Trader. As he wrote...

The S&P 500 Index is up 8% off its lows. We've seen rallies in small caps, technology stocks, financials, and more. There could be more gains in some of these sectors before the rally is over...

In short, the market's rally has been a nice change of pace after a brutal start to the year. But don't expect it to last without more pain on the horizon.

Chris went on to point out a specific sector – U.S. financial stocks – that has rallied lately, but he expected to drop imminently as it nears a pair of key technical indicators of "resistance."

Chris isn't shorting financials, but he told his subscribers to consider taking profits if they've been trading the recent 7% rally in the sector. The Financial Select Sector SPDR Fund (XLF) is due for a pullback, he says. That makes sense to us.

From 'buy the dip' to 'sell the rip'...

We're not in the same "buy the dip" era of the past 20 years...

In the immediate future, with the major U.S. indexes in a downtrend, we could be in a "sell the rip" environment more than anything. Counterintuitively, that means if you expect a rally – like Greg says is a possibility either broadly or in specific sectors – you have to buy first...

And that means ignoring what you've heard from me most of the year. Greg is eyeing up a couple bullish short-term trades depending on what his technical indicators tell him this week. As he wrote today...

I've been bearish for much of this year and rightly so – we're in a bear market. I expect this to continue, but some relief rallies within bear markets are worth trading. And I believe we're on the cusp of such an event over the next few weeks...

The longer term is a different ball of wax, though...

Don't be fooled by bear market rallies.

Much like garden-variety corrections in bull markets, temporary rallies are a normal part of bear markets. From a technical perspective, they can force short sellers to cover their losses, driving prices higher... and can also make a lot of people think the worst is over – when it's not.

In the longer view of five or 10 years, we're spending more time preparing for the possibility that high inflation could last longer than most people think. What does that market look like?

For one thing, it could mean you want to own some of the most defensive stocks on the planet... that famously beat inflation...

That's a big part of our colleague Dr. David "Doc" Eifrig's latest message, which we urge you to check out if you have not already.

You can do so for free right here. In the video, Doc – a former Goldman Sachs trader and board-eligible eye surgeon – shares research that he says will be his legacy... and details a sector that he says has the greatest potential for delivering big returns in the decade ahead.

Handicapping the week ahead...

We won't get too deep into predictions here, but I do want to set up some details.

Earnings will be what they will be. We've seen a mixed bag of market reaction so far this earnings season.

Streaming giant Netflix (NFLX), for example, reported losing 1 million subscribers last quarter and its share price jumped 7%, indicating maybe the worst is over for the company's shares.

Social media company Snap (SNAP), on the other hand, plummeted another 39% late last week after reporting earnings on Thursday. The stock is now down 79% since the start of the year and 90% over the past year.

Snap lost more money in the second quarter than Wall Street analysts projected. The company also said it was slowing its hiring, and it declined to give any forward guidance at all – a rare and troubling sign.

As Doc wrote in today's edition of his Advanced Options service, Snap's report could be a warning signal to the market about other businesses that rely on advertising revenue, which is declining as the economy has slowed. As Doc wrote today...

With inflation at 40-year highs and recession fears mounting, many companies have cut their advertising budgets. It's the first thing to go before layoffs.

A slowdown in advertising spending is what shook the markets last Friday. Shares of other companies that sell online advertisements went tumbling over fears they're facing some of the same pressures as Snap.

Social media site Pinterest (PINS) plunged 14%. Even bigger, financially rock-solid companies like Facebook parent Meta Platforms (META) and Alphabet (GOOGL) dropped 8% and 6%, respectively.

You can see why we'll keep close eyes on this earnings season.

On the Fed front, as I mentioned, traders in the bond market have priced in a 75% chance that the central bank will raise its benchmark overnight rate by 75 basis points. That would bring the rate to a range of 2.25% to 2.50%.

These same traders expected a 1% rate hike earlier this month after the latest consumer price index ("CPI") data came in higher than expected. But those expectations pulled back after comments from a few Fed officials that suggested the market was overreacting.

Since then, Fed governors have been in a standard "media blackout" period before a policy meeting... And they went silent before the markets developed as strong of a consensus as usual about what the Fed is going to do. So, for the first time in a while, what Fed Chair Jerome Powell says on Wednesday could materially surprise people.

The final 'big number' of the week is probably the most interesting...

Different people have different definitions of a recession. Some simply go by the thought of two straight quarters of economic contraction, as measured by GDP. In the first quarter, GDP declined by 1.6%. It's expected to decline again by at least another 1.6%.

Personally, that's good enough for me to say the economy has been in a recession the past six months. People in the markets call this a "technical recession."

As I've pointed out before, though, the National Bureau of Economic Research ("NBER") – a group of economists that you'll hear more about before we wrap up today – accounts for a few other factors before declaring from on high that the U.S. economy is in a recession.

The labels hide the practical truths, though...

What matters is what's actually happening to our money, our jobs, stocks we own, and prices we pay. That's why by the time an "official" recession is called, a lot of the damage has already happened in the stock market or people's livelihoods.

In 2008, the NBER didn't "announce" a recession until December... and when it did, it said the recession had begun a year earlier. It's better to prepare yourself and your portfolio in advance, much like our advice about preparing for inflation.

But labels matter to a lot of people and can color how people feel, which leads to more changes in behavior. If most people think we're in a "recession," then we are. With this in mind, I came across an interesting "blog" post published by the White House last Thursday.

We're a fan of this comment on the post by Ben Hunt, the founder of Second Foundation Partners and author of the Epsilon Theory newsletter...

Treasury Secretary Janet Yellen was on television over the weekend saying the same thing... that folks should ignore the typical definition of recession today because the jobs market is still strong. OK.

It sure seems the executive branch is buttering us up for another quarter of economic contraction. This messaging is all about what is and isn't a recession, like a primer of sorts for people who can't think for themselves.

That's not us.

Recover, Protect, and Compound Your Wealth

One of the best-performing sectors during past financial crises is once again outpacing the market. What does this mean for long-term investors? Stansberry Research senior analyst Matt McCall is joined by our Dr. David "Doc" Eifrig to discuss...

Click here to watch or listen to this episode right now. And to catch all of Matt's shows and more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 7/22/22): Booz Allen Hamilton (BAH) and Option Care Health (OPCH).

In today's mailbag, kudos for Dan Ferris' latest Friday Digest. If you haven't read it yet, you can do so here... And, as always, leave us a comment, question, frustration, whatever at feedback@stansberryresearch.com.

"Well Dan! You have out did yourself! You have been able to explain the world to us all in a nutshell! This Friday's Digest is far beyond anything, anyone has ever been able to explain. A true masterpiece of thought and process...

"I will carry it with me always, in peace and a better understanding... 'that it ain't over, until it's over' and the fat lady (Mr. Market) sings (and says it's over)... That's the way of the world!" – Paid-up subscriber Don W.

"Dan, another impressive column. You apologized for not having charts or numbers, but that's the beauty of your work. You explain in human, no nonsense terms, why we, as investors and imperfect decision makers, act as we do.

"Thanks for your thought provoking analysis." – Paid-up subscriber Eric A.

"Markets and murmuration. Fascinating." – Paid-up subscriber Dennis L.

"Hi Dan, This is the best article I read in the last 10 years. Congratulations. I am in the business since 1959!" – Paid-up subscriber Georges R.

All the best,

Corey McLaughlin
Baltimore, Maryland
July 25, 2022