Since the S&P 500 (SPY) hit new lows in mid-June, the bulls have regained the lead. At first it looked like a typical bear market rally. However, there are more and more signs that this could be the real deal. As in the new bull market may have arrived. That topic is very important, as one’s outlook, whether bullish or bearish, weighs heavily on how they construct their portfolio for the days and weeks ahead. That’s why we’ll focus on that topic in today’s commentary. Read on below for more….
(Enjoy this updated version of my weekly POWR Value newsletter commentary).
Like George Washington… I can’t tell a lie.
I’ve been downright bearish since mid-May. Initially, that strategy paid off as equities tumbled to new lows in mid-June. And since then, being a bear has been… unbearable!
In fact, at the MoneyShow earlier this week, I doubled down on my bearish opinion with this new presentation titled: Bull or Bear…Which Is It?
My goal was to provide a balanced view of the bull case versus the bear case. Indeed, there are some reasons to be bullish. In addition to the obvious price action taking place, you have signs that…
Inflation can spike
No serious dents on the labor market
Q2 results season better than expected
ISM Services showed a surprising increase last week.
Note that I could spend the next hour poking holes in the above bullish arguments. Instead, I’ll just say that the preponderance of the evidence for me is still bearish.
Because yes, it may be true that we’ve been able to get around a recession so far, but that doesn’t mean we’ll avoid one in the near future with lower prices on the way.
This means that inflation may be peaking… but a drop from 8.7% to just 8.5% should not cause anyone to breathe a sigh of relief.
Especially since that data is from the end of July. Since then, the commodity index has moved higher, as you will see below, meaning inflationary pressures are far from gone.
Add to that a non-stop parade of Fed officials singing from the same song sheet that goes like this:
We are going to seriously increase the rates… yes, yes, yes
We don’t care how much it grinds your teeth… yes, yes, yes
We just need to stop inflating the prices of so much… yeah, yeah, yeah
(All rights reserved to Reitmeister Economic Sing-A-Long Productions 😉
As those rates rise, borrowing becomes less attractive. This leads to less investment by companies. Which equates to lower spending.
Typically, that cycle extends to lower profits, job losses and broader economic pain. And yes, these would all be signs of recession and bear markets.
For now, it’s clear that the bulls are in charge. The next real test is on the 200-day moving average which currently stands at 4,328 (about 1% above Friday’s close). No doubt there should be some serious resistance at that level that will test the conviction of investors.
The more they see the potential downsides blowing away… the more buyers there will be in the stock market (SPY)… the more likely we are to get above 4,328 and return to the resumption of another bull market.
However, if that harbinger of a future recession deepens, investors will first pause this rally to await further signals. And the more ominous the signals… the more stock prices would fall.
You could almost compare it to tug of war. Whichever side has stronger evidence will pull investors in their direction.
Again, I see the potential for the next bull market to start now. Just think the bearish outcome is more likely. Now we have to objectively assess each new round of economic data as it turns out to be on the right side of the tug-of-war with our investment strategy.
We haven’t talked about performance in a while. Fortunately, today’s surge has pushed the POWR Value portfolio back into positive territory for the year, which is much better than the still 10% loss for the S&P 500 (SPY) in 2022.
Helping with that is our portfolio’s strong earnings season, with most of the estimates and target prices rolling upwards after their announcements.
Our POWR Value strategy currently remains 50% long. It will be difficult for me to agree to a more aggressive stance until we cross the hurdle of the 200 day moving average at 4.328.
As that unfolds, we’ll go back to adding more stocks that rank highly on POWR Ratings and Value Metrics.
The last few weeks have reinforced the lesson on how difficult it is to time the market. That’s why so few professionals won’t try, because it’s so easy to get tangled up.
And I feel like the market isn’t done serving up mixed messages to keep people dazed and confused.
The path is likely to become clearer after the battle for the 200-day moving average. Let’s keep a close eye on that and adjust our portfolio based on what that tells us.
What to do?
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All the best!
CEO StockNews.com & editor of POWR Value trading service
SPY shares closed at $427.10 on Friday, up $7.11 (+1.69%). Year-to-date, the SPY is down -9.41%, versus a % increase in the benchmark S&P 500 index over the same period.
About the author: Steve Reitmeister
Steve is better known to the StockNews public as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock selection.
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