1.4% Stock Market Drop: Pullback or the Beginning of a Bear Market?

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Market News and Short-Term Predictions

Finally, we are seeing a pullback in the markets this week with the S&P 500 Index ending 1.4% lower while the Nasdaq 100 benchmark fell 1.3% as investors took profits from the year’s winning technology names.

This is exactly what I was calling for last week as healthy markets don't go straight up. You need rotation between sectors and a consistent rise in EPS across companies to have a sustainable run-up.

Part of the pullback could be blamed on some fear over the following Bloomberg news updates (some of which are US-based and others overseas):

Federal Reserve Chair Jerome Powell dampened the mood this week when he said the US may need one or two more rate increases in 2023.

Economic data from Germany and France ignited fears of a downturn in Europe, spurring Treasuries to take part in a global bond market rally as investors sought safe havens.

US Treasuries yields fell Friday, some by as much as 10 basis points. The inverted spread between the two- and 10-year bond widened to more than 1% (levels not seen since March of this year) — such inversions are considered a recessionary signal.

Losses in Chinese assets are mounting again as Beijing’s modest stimulus disheartens investors. The one-year and five-year loan prime rates were reduced by 10 basis points each, according to a statement by the People’s Bank of China. While that was in line with the reduction in the PBOC’s policy rates last week, some economists had predicted a bigger reduction of 15 basis points in the five-year rate, a reference for mortgages, to support the ailing housing market.

Do I think we crash from any of this news development? No. Do I think we can pull back regardless of any new developments? Yes.

The only one that would cause a larger drawdown would be if the Fed kept raising rates past current expectations of a raise or two left. But again that would be more of a 5-10% pullback and not a new bear market.

Lessons to Be Learned

With any news coming outside of the US, I try not to have it influence my investing decisions too much. Remember when China had its real estate debt crisis that was going to tank all markets? Yeah me neither.

Essentially I stay the course and try to focus on the markets I understand better. Trying to switch up your investments based on the business cycle of every country would be crazy as things are constantly changing. I realize the economy is global, but since most of my investments are based in the US, I tend to give the US business cycle the most weighting.

Portfolio Update

Options Trading Portfolio

Closing Trades

I closed two winning trades this week and made two other adjustments to the strangles I sold in PLTR/SOFI. For the winning trades, I closed a credit call spread in SPY I put on last week for a $78 profit or a 50% win. The second trade was an iron condor I ended up trading for only a $26 profit as it only had a week left till expiration and with the market pullback, it came under the sold call strike of $435. In order to avoid huge gamma risk, I ended up closing it early. In both strangle positions, I ended up rolling down the call sides to collect an additional $22 on each strangle in PLTR/SOFI.

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