(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
Let’s talk about facts, then get around to opinion and strategy.
The market did test the 50 day moving average on May 19th when it swung down to an intraday low of 4,061. However, it never tested 4,000 like I suspected nor crossed under to take a shot at the 100 day moving average 1% below that level.
Since hitting the 50 day moving average the S&P bounced for 4 straight sessions before taking a minor breather today. Yet for a second straight session did spend part of the day flirting above 4,200.
Do remember that the market spent a full six weeks consolidating under 4,000. This period from mid February till early April came with many pullbacks and violent sector rotation. Then it built up enough energy to sprint to a new record high of 4,236 by early May.
By comparison, we have only spent a modest 2 weeks in consolidation mode under 4,200. Yet have little doubt that the sector rotation has been mighty violent. That shows up in the haircuts taken by many of the most hyped groups like tech stocks. And let’s not forget the air taken out of the bitcoin bubble (more on bitcoin further below).
At this stage I am not waving a white flag on my lower stock price prediction. I still very much believe that we are in consolidation mode with more time to be spent under 4,200 before the bull market makes its next meaningful surge higher.
So at this time the key technical levels are as follows:
4,100 = 50 day moving average
3,973 = 100 day moving average
3,732 = 200 day moving average
So yes, I still believe that the 100 day moving average will be tested before all is said and done. However, there is not much need to test the 200 day moving average at 3,732. That seems like too dramatic a drop with such a long term bullish back drop (low rates + improving economy).
To be clear, we could get that low. I just suspect we won’t because there should be too many willing buyers under 4,000 to prevent that from occurring.
So this gets us back to the focus of our commentary; Am I wrong? Or just early?
The reality is that both are possible answers. I suspect that I will be proven right in time and that is why we still have a modest store of cash.
However, my 40 years of investing has taught me that no matter how sound your logic, you can still be wrong...and sometimes VERY wrong. And thus, you have to weigh that into your investing strategy.
A good analogy would be like playing chess only caring about your offensive moves. But remember there is an opponent and you have to be as focused on playing defense or you quickly lose the game.
A firm understanding of this notion leads to only taking more modest bets. Like only having 21.5% cash at this time instead of 50% or more like some hyper aggressive traders are willing to do. Heck, there are people right now who actually have no long positions and are just shorting the market.
My method of taking smaller market timing bets allows me to benefit in the likelihood that I am right, but not unduly harmed if I am proved wrong. Along with that is having a contingency plan to unwind the position if indeed I am on wrong side of the action.
Here is the worst case scenario. Let’s say the market does soon break out above 4,200. Terrific. Then the vast majority of our portfolio already invested in stocks will be racing ahead. And we will quickly deploy the rest of the money into 3 new positions and not really be left behind.
What is most interesting at this time is that even with the S&P back at 4,200 that many of the stocks on my radar continue to head lower (like some of the industrial/materials picks). That is a sign that the broad market index is not showing the violent sector rotation action happening underneath.
So I still like the odds of deploying our spot of cash on some great buy the dip opportunities even if the bull keeps running ahead.
Now let’s shift gears back to the improving economic picture which continues to provide a favorable backdrop for the long term health of this bull market.
Last Thursday we got a double dose of goodness with Jobless Claims making another move lower to 444K. This got followed by another strong regional manufacturing report in the 31.5 showing for Philly Fed. Truly any reading above 10 is quite favorable.
The good economic vibes were echoed the next day when the PMI Flash report leapt from an already impressive 63.5 up to 68.1. Services was the strength of this report with that component rolling in at 70.1. To be honest, I don’t ever remember a reading that high for this key report.
Today we got a slew of additional positive readings. Yes, home prices are on the rise (and in my book a good part of the inflation story that is not being properly represented in current Treasury rates...but should be when the Fed stops overly manipulating the bond market).
Also Consumer Confidence is strong. It certainly helps that the Government is picking up 1/3rd of consumer spending with their stimulus programs. And by the Government picking up the tab I really mean that you and I and future generations will be paying for this for the next 50 years. I will get on my soapbox about that some other time.
Lastly, the Richmond Fed Manufacturing index of 18 is not as impressive as the aforementioned Philly Fed...yet clearly another sign of robust economic improvement.
Long story short, economic activity continues to improve which helps with the long term bullish backdrop even if there is good reason for short term pullbacks and volatility.
Now let’s talk about bitcoin. Long time RTR members know that I have been mum on the subject in my written commentary. Yet there has been a comment here or there in the Q&A section of monthly webinars that this value investor disdains this type of investor speculation. And won’t be touching bitcoin with a 10 foot pole.
Gladly others are starting to see the error of their ways as Bitcoin is down 41% from the peak. And other frothy investments in speculative growth arenas are also seeing some air let out of their bubble.
Don’t read this wrong. In fact, I believe this is an incredibly healthy sign for the long term bull market that we are squeezing out excesses now.
This form of self cleaning often prepares the market for a healthy broad based future advance with a focus on growth at a reasonable price type stocks. Yes, that is my jam...and am hopeful it will be beneficial in letting us expand our lead over the market later this year.
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Steve Reitmeister
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
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About the Author: Steve Reitmeister
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