(Please enjoy this updated version of my weekly commentary published March 18th, 2022 from the POWR Value newsletter).
Market Maxim 1 = Buy the Rumor, Sell the News
Let’s start here. Did the market bounce this week because…
Russia/Ukraine crisis is over? Clearly not
Raging inflation is over? Again, clearly not. Even the Fed is being a bit more vocal about it not being as “transitory” as they previously stated. But if there is a positive to point to, the spike in oil to $125 a barrel earlier in March that quickly abated.
Yet still the price at the pump is shocking to most, which is never a positive for consumer behavior.
The Fed is now being more accommodative? Once again, a hearty NO as they announced on Wednesday their first rate hike in a long time with the intention of another 6 hikes this year given concerns over inflation.
This included a reduction in their economic outlook for the year.
The reason for doing this roll call is because these were also the 3 reasons most oft stated for why the market was in correction mode with fear of even more downside to come.
So if these situations did not improve, then it is a little bit of a head scratcher as to why we have enjoyed such an extended rally from recent bottom.
One theory would be to review classic investment sayings like:
“Be greedy when others are fearful”
“The market climbs a wall of worry”
Both of these harken back to the idea that investors are often forward looking and thus stocks will bounce back BEFORE the proof of improvement is in hand.
Another theory is that to go down much further would be to move into bear market territory. That takes a lot of investor conviction to believe the economy is heading to recession when no such evidence is at hand.
This would lead to a bounce from bottom…but not go much higher until we have more proof that the worst is behind us.
Interestingly we closed the session today above the 50 day moving average (4,432) for the first time in a while. And ever closer to the long term trend line of the 200 day moving average @ 4,470.
I suspect that this bounce is really a combination of these two different theories at play. And that stocks will likely consolidate around the 200 day moving average for a while until more evidence rolls in.
If the bearish trends surrounding Russia/Ukraine crisis and/or inflation worsen, then likely we will retest the recent lows of 4,161…or perhaps finally test the scarier level of 4,000.
On the other hand, the more comfortable we become with the outlook for the economy, even with Russia/Ukraine not resolved, the more likely we are to break above the 200 day moving average.
Perhaps we only make it back to the previous highs of 4,800. That is the current Goldman Sachs view for 2022. Or hopefully a notch higher.
That may not sound like the most robust investing environment. But after 2 years of outsized returns, it is not uncommon for the market to lay an egg as investors squeeze out excesses on overripe stocks.
Gladly, these are the best of times for value investors as the rest of the market comes around to our way of thinking. This explains why we are up +1.82% this year when the S&P 500 is down -6.36% and the famed Ark Innovation Fund (ARKK) is still down -30.47%.
I like our odds to further that over other investors as the year progresses.
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All the Best!
Steve Reitmeister
CEO StockNews.com & Editor of POWR Value trading service
SPY shares closed at $444.52 on Friday, up $3.45 (+0.78%). Year-to-date, SPY has declined -6.41%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, 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 picks.
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