Opinion: ‘The Fed-fueled fantasy bubble has popped.’ Stock investors are detached from reality — but they’re about to get a big dose.

After the U.S. stock market made all-time highs last year, I spoke with Jeffrey Bierman, a professional stock-trader with more than three decades of experience. Bierman also lectures on TheoTrade.com and TheQuantGuy.com, and is an adjunct professor at Loyola University and DePaul University, both in Chicago.

At the S&P 500’s
SPX,
+1.19%
high he predicted a drop to 3600 or lower in 2022, and he was right. I recently caught up with Bierman to discuss his latest projections and strategies for U.S. stocks: 

MarketWatch: What strategies do you recommend for investors in this environment? 

Bierman: First, you can’t be 100% in stocks. Second, you have to look for yield. The yield on bonds right now is competitive with stocks. If you can get 4% for a bond with half the risk of the S&P 500, then it pays to buy bonds because the yields are secure and volatility is lower. Move more towards fixed income and move away from high beta stocks with high multiples. Because in bear markets, there is little to no growth. Value dominates in a bear market, and growth dominates in a bull market. 

MarketWatch: How do you know this is still a bear market? 

Bierman: If it looks like a duck, walks like a duck, and quacks like a duck, it’s a duck! Most stocks are far below their 200-day moving averages. Also, even when good news comes out, most stocks can’t get any traction. Finally, during the last few months, money has been flowing out of stocks and into bonds. All of these clues suggest a bear market. 

MarketWatch: If you’re right, when will this bear market end? 

Bierman: When growth stocks start to underperform and value stocks outperform. Then investors throw in the towel on growth stocks. That’s when we know we are close to the end of the bear market. 

MarketWatch: Is it time then to start looking for a new bull market? 

Bierman: Not even close. The final stage of a bear market is capitulation, when investors give up. Retail investors are worried right now but the wealthy are not. If we take out 3600 on the S&P 500, the wealthy will worry. But be careful of a fakeout. The market could drop below 3600 and bounce. That’s when everyone thinks the bear market is over. Instead, you get one final flush. 

MarketWatch: How should traders approach this market? 

Bierman: You must be nimble. Trade in short ranges. This is not a market where you will get “gamma squeezes,” (when a stock soars in a short time period). Traders need to take profits quickly and often, and don’t reach for the big swings or big moves. I call this the “fits and starts” market. 

MarketWatch: How do you personally trade this market? 

Bierman: I trade in large-cap and midcap stocks, and no small-caps. I also trade small size. For example, one of my accounts has $125,000 in it. The largest position I have is $4,000 to $5,000. I trade no more than 1% to 3% of my entire portfolio on one position. You should never trade more than 5% of your portfolio in one position. Trade small. 

‘I call it a slow-motion bear market — think of it as progressive stock bloodletting.’

MarketWatch: What’s your prediction for U.S. stocks in the near-term? 

Bierman: I want to be conservative in my projections. Realistically, we tag 3200 to 3300 on the S&P 500. In a worst-case scenario, we could tag 3000 this year. The best-case downside projection is 3500. 

MarketWatch: So even in your best case, stock investors still will feel more pain before the conditions improve.  

Bierman: I’m not Darth Vader but yes, I expect it will get worse, but not extraordinarily worse. We are not in a 2001 or 2008 type of bubble. I call it a slow-motion bear market — think of it as progressive stock bloodletting. It will fool a lot of people. Think about a frog in a warm bath that gets hotter. By the time the water is boiling, the frog is dead. 

MarketWatch: Why are stock investors in such a tight spot now?

Bierman: This market got hooked on the Fed’s easy money. After the 2008 housing crisis, there was a handoff from Bernanke to Yellin to Powell using quantitative easing. Instead of the normal 4% to 5% interest rates, they went to nearly zero. It was like the limbo game — how low can you go? The market got comfortable, then delirious, with that low-interest rate mindset. The Fed had a chance to take away the punch bowl at 3400 [on the S&P 500] but chose not to. Then we overshot by nearly 1400 points. This is the excess that has to be worked off. 

MarketWatch: Aren’t higher stock prices a good thing?

Bierman: It’s detached from reality. It’s like an automatic brainwash where fundamentals and value don’t matter anymore. The only thing that matters is that the Fed is providing easy liquidity and to hell with anything else. That helped create an inflationary bubble and all of a sudden the market’s mindset changed. Last year was a wakeup call. For the first time in 10 years, there was a reality check. That’s when people realized the Fed can’t always stand behind the market and hold interest rates at zero. 

MarketWatch: What will it take this time for investors to get real about market conditions? 

Bierman: People are slowly realizing that something has changed. People had been living in a fantasy world by the three Fed chairs. It damaged the mindset of the average individual. Even many pros drank the Kool-Aid and believed that nothing mattered except the Fed liquidity policy. As you can see now, the market can’t get any traction. The Fed-fueled fantasy bubble has popped. 

Michael Sincere (michaelsincere.com) is the best-selling author of “Understanding Options” and “Understanding Stocks.” His latest book, “How to Profit in the Stock Market” (McGraw Hill, 2022), is aimed at advanced short-term traders and investors. 

Also read: Stocks, bonds correlation shifts as fixed-income market flashes recession warning

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