Investors were drawn to the border of bear market territory like a moth to a flame. And just as they were about to cross bear market territory below 3,855, a rally followed late Thursday. That was further expanded to 4,023.89 on Friday. Is this just a bear market rally or really the end of this dramatic 4 month correction? That discussion will be the focus of today’s POWR Value commentary. Read on below for more….
(Enjoy this updated version of my weekly POWR Value newsletter commentary).
Let’s turn the clock back a week to our previous comment of 5/6: 2 divergent paths for the stock market from here.
This was a long piece dealing with what it would mean to break below 3.855 in a bear market area versus bouncing at that level with the bull market resumption.
Not surprisingly, stocks once got this close to 3,858 before the support kicked in, leading up +4.3% to Friday’s close.
Unfortunately, this support is NOT proof that the threat of the bear market is over. Then again, it could very well be the obituary for the nasty 2022 correction.
This brings us to a new fork with 2 potential paths. Let’s take a look at the possibilities that are almost equally likely in my book:
Bulls on Parade: FOMO Rally
Imagine a 2-3 week rally where stocks only climb higher each day. Bears hold out first. But little by little, they will give in to their FOMO fears.
Plus all the dry powder in cash is starting to come off the sidelines.
It wouldn’t be unusual for stocks to rise 10-15% in that time frame and cross all major moving averages, leaving no doubt that the bull market was back in control.
Before you get too excited, let’s take a look at the other equally plausible scenario that will dampen your enthusiasm…
Consolidate here and postpone the Bull/Bear conclusion
Remember that relief rallies are typically +3-5% before testing lower again. And that’s about the size of the bounce we got from Thursday afternoon to late Friday.
So it’s not hard to imagine us spending time in a trading range between the bear market area border at 3.855 and 4.100.
This means that bulls and bears will fight it out a little longer before making the final decision as to whether we fall into bear market territory or whether another bull will resurface.
We would all prefer the first choice. And can even create logical presentations showing why that’s the most likely outcome.
Unfortunately, we have to realize that the combination of high inflation and aggressive Fed is not the most stock-friendly environment.
No guarantee of a bear market… but fertile ground that could support the growth of bearish conditions.
Add it all up and we’re not that far from the aberrant paths discussed last week. And that keeps us in wait-and-see mode.
If the bull expands further from here, we’ll have some more uber-attractive stocks in the portfolio that have shone for the past two days and would continue to thrive in that environment.
Any file that doesn’t lose its former red arrows soon will be replaced by files with a greener horizon.
If we get into a bearish market, we know how to get more defensive, as outlined last week.
We appreciate that investors generally understand that patience is a virtue. And you’re going to have to lean into that reservoir of patience to get through this next market phase.
Keep calm and keep going!
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All the best!
CEO StockNews.com & editor of POWR Value trading service
SPY shares closed at $401.72 on Friday, up $9.38 (+2.39%). Year-to-date, the SPY is down -15.16%, 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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