SMI's Bear Alert indicator triggered this past Friday. That means the S&P 500 put in its first weekly (Friday) close at a level more than -15% below the prior high.

That high was set a little more than four months ago on Jan. 3 — 4,796.56.  On Friday, the 500 index closed at 4,023.89.

Everyone take a deep breath.

It's been ugly out there the past three days. Four months into this bear market, we finally got the first whiff of real fear and perhaps a little capitulation selling yesterday. There are two things that make me think that: 1) yesterday's volume was significantly elevated while the market was falling hard, and 2) we finally had our first glimpse of a "flight to safety" rotation out of stocks and into bonds.

Unfortunately — and I really hate to say this — but I think this gets a lot worse before it's over. We'll get into that in a moment.

The big day is finally here — Fed day, the day everyone expects the Fed to begin tightening conditions in earnest. This has been long telegraphed, as modern central banks seem to hate surprising investors. But it's still a big deal, because today we find out if they're actually going to take the tough actions they've been talking about...well, seemingly forever now.

There is no change to the official SR recommendation for May. Read on for the details.

Sector Rotation is a high-risk/high-volatility strategy. While its peaks and valleys have been more extreme than SMI's other strategies, it has generated impressive long-term returns, as discussed in Sector Rotation is Risky, But Highly Rewarding and A Great Strategy Gets Better: Inside Recent Sector Rotation Changes.

There is one change to the DAA lineup for May. Read on for the full details.

DAA is a core portfolio strategy designed to help SMI readers share in some of a bull market’s gains, while minimizing (or even preventing) losses during bear markets. The strategy involves using exchange-traded funds to rotate among six asset classes, holding three at any one time.

DAA is a defensive, low-volatility strategy that nonetheless has generated impressive back-tested results when evaluated over full market cycles, demonstrating the power of "winning by not losing."

The recommended categories/ETFs for May are (in order of current momentum):

The SMI strategies did a solid job of limiting losses during the first quarter of 2022, as the bear market we’ve anticipated since our January cover article kicked off. While most of SMI’s strategies registered small first-quarter losses, they were significantly less severe than the broader market.

Importantly, this occurred while our holdings were transitioning from a bullish market regime to a bearish one, the type of market turning point that is often the most difficult part of the cycle for our trend-following strategies. In light of that fact, it was a highly successful quarter.

Given all that has transpired in recent months — Russia’s invasion of Ukraine, record inflation, energy prices spiking, and so on — it’s easy to forget the S&P 500 index was still rising as the year began. It would register a new all-time high in early January, which meant our portfolios began the year positioned in the sectors that had been working over the bull run of the prior 18 months. The most obvious of which was large/growth stocks.

Thankfully, the SMI strategies had already picked up on declining momentum within the more speculative corners of the market, which helped us avoid the worst of the damage in smaller/growth stocks. And our bond positioning was on point as our strong tilt toward short durations and inflation protection helped immensely.

There's a perception that the Fed hasn't done much yet to counter inflation and that this battle will basically begin at their May meeting.

That's largely accurate, as the Fed has been way behind the curve in dealing with the inflation threat. First, they misdiagnosed it as transitory, then they clung to that narrative long after it was obvious inflation was persisting, and finally, they've dragged their feet on taking action to curb it, opting to make just one tiny quarter-point hike so far.

It has been a wild start to 2022. This has obviously been true in the "real world" as the world deals with a major European land war for the first time in decades.

It's also been true in financial markets, as the small-company Russell 2000 index and tech-oriented Nasdaq stock indexes fell into "bear markets" (losses of -20% from their November highs), only to rally sharply late last month and then roll over again somewhat in April.

And then there's the bond market.