After getting as low as 5,119 on Monday, the S&P 500 (SPY) has mounted an impressive comeback to 5,319 as of Thursday’s close.
This begs an obvious question: Is the Worst Over?
As in, is this bounce for real?
I will tackle these vital questions and more in the article below.
Market Commentary
Even though I am primarily a fundamental investor, I think its important to start with the technical picture given the wild price action of late.
Moving Averages: 50 Day (yellow) @ 5,445 > 100 Day (orange) @ 5,311 > 200 Day (red) @ 5,026
One could say that the market has reclaimed an important battleground. That being Thursday’s close back above the 100 day moving average at 5,311.
However, one close above means very little. Even two would not cement that we are back on the incline for good. Typically, it is 3 consecutive closes above that greatly increases the odds of a lasting upward trend.
The likelihood of that has a lot to do with the 3 main reasons that investors started selling in the first place.
- Recession fears growing
- Unwinding of Japanese Carry Trade
- Warren Buffett Signals End of Tech Rally
The Japanese Carry Trade issue seems to be nicely tucked away for now. Just amazing how much damage took place worldwide in such a short period as everyone ran for the exit at the same time. Barring any currently unforeseen fallout, in terms of financial institution failings, then perhaps this is the last time we hear about this problem.
As for the tech sell off, it’s not just Warren Buffett taking profits off the table. Just simply investors were playing a game of Jenga with the Magnificent 7 stocks. Valuations can only get so high before it becomes unstable leading to a well overdue tumble.
So really the most important of these 3 concerns is to make sure we do not descend into recession. Here is the key section from my last commentary on Tuesday that puts it into perspective:
“Yes, recent economic data has come in softer. Namely ISM Manufacturing and Government Employment Situation last week. Neither spells recession...but does point to a slowing of the economy.
Now let’s remember the whole purpose of the Fed raising rates in the first place.
Lower Demand > Soften Economy > Tame High Inflation
This was all part of the game plan of the Fed...it just took a lot longer than expected to come to fruition. This recent soft data represents the final nail in the coffin for high inflation further emboldening the Fed to lower rates at the next meeting on September 18th.
The only question now is whether it will be a modest 25 basis point cut. Or will they up it to a 50 basis point cut which is now the assumed outcome given this past week’s stampede out of stocks and into bonds.
Plain and simple, we need to heed the time tested advice “Don’t Fight the Fed!”
That’s because they are about to serve up the medication (rate cuts) needed to avert a recession and keep the stock market in bullish territory going into 2025.”
Even though the Fed does look to be on track for sticking their soft landing, unfortunately it is also true that 12 of the last 15 rate hike cycles ended in recession. Thus, it is not crazy to keep an eye on the state of the economy. Here are the key reports on the docket between now and the next Fed meeting on September 18th:
8/13 PPI
8/14 CPI
8/15 Jobless & every Thursday thereafter
8/21 Fed Minutes
8/30 PCE
9/3 ISM Mfg
9/5 ISM Services
9/6 Government Employment Situation
9/18 Fed Meeting
When folks are uneasy then it doesn’t take much to send them over the edge once again. Meaning that even just 1 of these reports pointing to greater odds of recession, then quite possible for stocks to retest recent lows or lower.
Now throw into the mix that the Presidential election outcome is looking uncertain. Typically, that leads to a dose of caution and pullback in stock prices as it did the past 3 election cycles.
And now throw in that September is historically the worst month of the year for stocks.
Putting it altogether, I still believe we are in the midst of a long term bull market. However, between now and the election I think we will spend more time exploring prices down towards the 200 day moving average (currently at 5,026).
Those who appreciate that this weakness is temporary will see it for the attractive “buy the dip” opportunity it truly is. That means to load up on the best stocks to outperform down the road.
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SPY shares were trading at $531.40 per share on Friday morning, up $0.75 (+0.14%). Year-to-date, SPY has gained 12.51%, 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 This Stock Bounce for Real? StockNews.com
