Breakout

Rally? What Rally? Welcome to the New Bear Market: Suttmeier

Jeff Macke
Breakout

Now that stocks have fallen nearly 20% from their highs, every perma-bear on earth is coming out of his den to claim victory. In general you're better off ignoring anyone who's "perma" anything; being early on stocks is tantamount to being wrong, especially when the tape is as volatile as we've seen in the last decade.

The market prognosticators you should listen to are the ones who helped investors both make and keep profits during this recent brutal stretch. Breakout identified the real deal with Richard Suttmeier from ValuEngine.com. On May 18th Suttmeier came on our show and told us in no uncertain terms that he thought the market top was put in on May 2nd and the Dow could quickly fall 1,000 points or more. "Something big is happening," said Suttmeier. "I think the Dow goes below 11,500."

Now that I've taken his victory lap the obvious question is "Where do we go from here?"

Suttmeier has good news and bad news. The good news is he agrees with me that the lows hit after the Federal Reserve statement on Tuesday will hold, at least for now. He sees about 1,100 on the S&P500 and 10,600 on the Dow Jones Industrial Average as levels traders will "defend." Taking that out of market jargon, Suttmeier believes traders saw the steep plunge as a buying opportunity and put major cash to work in stocks there. If or when the market re-approaches those lows, traders can be expected to buy again. Support levels are self-fulfilling prophecies; traders buy a level and if the trade works, they buy it again.

Now for the bad news.

Suttmeier believes the nascent rally is taking place as part of a larger Bear Market. A bear is simply a dyslexic bull; while you buy the dips in the latter, rallies are made to be sold in the former. Suttmeier says the selling could resume even before his 3-5 week rally forecast without some sort of "catalyst to get us out of this mess." Failing that mental push, which would likely need to come from Washington D.C., Suttmeier thinks 9,600 on the Dow by year-end is a distinct possibility.

Bear market rallies are the sharpest rallies. The big picture may be bleak, but Suttmeier thinks we get a 10-15% move higher here before the selling pressure reasserts itself. For at least the moment, the technicals shape up well and ValuEngine.com's fundamentals show nearly 88% of the 5,000 stocks in its universe are undervalued.

These are good enough reasons to buy stocks but are they good enough to keep people from indiscriminately selling them later?

As always, only time will tell.

Let us know what you think in the comment section below.

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