(Please enjoy this edited version of my weekly commentary from the POWR Value newsletter).
The stock market does not go straight up even during the most glorious bull market. There are periods of consolidation, pullbacks or even violent corrections before the next leg higher. This time is no different.
The reason why I am laughing is that its such an obvious pattern that to give it more weight, as so many other investment media outlets state, is downright silly.
Don’t get me wrong, I see the losses on my screen and decline in my portfolio value too. But I fully understand them as temporary events that are natural in the course of a long term bull market.
Let’s explore this concept deeper and set ourselves up for what should be a pretty meaty bounce next week.
Market Commentary
In essence I feel that we are simply going through a “technical” issue for the market...not fundamental.
Meaning that if there truly was a fundamental deterioration in the outlook for the economy and corporate earnings, then investors would be right to sell off...and continue selling off beyond where we stand today.
I tackled the 3 main bearish storylines being put out there in the investment media in my article this week: 3 Bearish Myths Busted. That covers the fundamental side of the story to point out why the bull market should keep on its merry way.
(1/24/22 Update: The above 3 Bearish Myths Busted review did not include the recent concerns about Russia invading the Ukraine. So let's cover that now.
Here is the sad fact...warfare is bullish for the stock market because it leads to tremendous government spending which boosts the economy. I am not saying I want this to happen. But the idea the stock market is selling off because of these fears is foolish in the face of the historical evidence that the market usually goes up in the months following the start of military action).
So if its not fundamental in nature...then it must be technical. Meaning where market forces are titled towards fear at the moment and need to find its next water level. That level is the 200 day moving average which is also called the long term trend line.
Indeed that is exactly where the market found itself today. Testing the 200 day moving average for the first time since June 2020. Yes, a very long time.
Here is the 2 year chart showing the 3 key trend lines 50 day moving average (red), 100 day (green), 200 day (purple).
Note that we typically hit the 200 day moving average once or twice a year to test investor conviction. The fact that is been over 18 months since the last test tells you that bulls have gotten a bit too comfortable. And this need for shaking things up was long overdue.
The fact that is taking place on Friday, after a string of losing sessions, is very textbook. Meaning to end the week with a big downward exclamation point is very common.
My bet is that a bounce is coming next week. I am not saying it will be all rainbows and lollipops. There likely will be some volatility mixed in. But all in all, I would expect by the end of next week that the market will be back above the 200 day moving average. And quite possibly well above.
Therefore we need to hold firm through this technical test. To realize that the stocks that fell the most will most likely bounce the most. And thus why some of the larger red arrows in our portfolio will become smaller red arrows soon...and hopefully back to green when this whole mess is behind us.
Reity, what if you are wrong?
It’s a fair question. This time could be different. And things could get worse on technical basis...and even worse on fundamental basis giving greater merit to downside.
As an investor we always have to be open to the chance that we could be wrong. This allows us to create contingencies to change course if a more logical theory emerges.
So right now, given all the facts in hand, I strongly believe that what I shared above is the right course of action for our investment strategy. But indeed, if things did get worse, especially on a fundamental level, then I would be open minded enough to appreciate that and make changes such as becoming more defensive in our posture.
What does that entail?
I will save the major specifics IF we even need to consider it. But in general it means selling the most aggressive stocks and keeping the most conservative. Raising a bit of cash. And perhaps even shorting the market with inverse ETFs.
We will just put that on a shelf for right now. Instead we will go with the prevailing logic that this is still very much a bull market and we will pass this test of the 200 day moving average by seeing stocks bounce higher in the days and weeks ahead.
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SPY shares fell $1.33 (-0.30%) in after-hours trading Friday. Year-to-date, SPY has declined -7.79%, 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.
Is the Bear Market Here? StockNews.com
