Over the past week, the S&P 500 (SPX) is relatively breakeven. If you ask the average investor how they are doing, they will tell you unequivocally that this weak has been downright brutal, states Steve Reitmeister, editor of Reitmeister Total Return.
That's because we are going through the same kind of consolidation and sector rotation period experienced a dozen or more times since this bull market began 20 months ago. That being where all the money flows to the FAANG stocks (and some of their best friends) and everyone else gets kicked in the groin.
Historically, utilities and consumer staples were the safe havens during these rocky times. Now, the FAANG stocks are considered the place to safely store your money (this is NOT your father's stock market).
Let's dive into what this means and how we navigate through the troubled waters to profitable shores.
Indeed, I was right that the market was not ready to breakout above 4,700, as discussed in last week’s commentary. Instead, we have your classic consolidation period with violent sector rotation.
The key words of wisdom at these times is what begets today’s headline: Don’t Move.
Why say that?
Sector rotation periods in the modern market are violent periods of turnover. Whereas the major indices may not move much, you will see great upheaval from group to group.
Yesterday was a prime example. The overall market was barely in plus territory (actually down if you look at the red arrows in small caps). However, the financial sector was up +1.12%, and even better was the Energy sector at +2.84%.
On the other hand, sectors from healthcare, to communications, to technology, to consumer cyclical were painted red.
The funny thing is that next week it might be the exact opposite. Meaning, don’t look for rhyme or reason in these daily moves as it will drive you insane. And thus, it's best not to move from your current positions if they are healthy, growing companies trading below fair value (if they don’t meet that basic criteria...then there is no good reason to own that stock).
Just like they recommend for seasickness, you need to fix your eyes on the steady horizon off in the distance to settle your stomach. The same is true here in staying focused on the long term fundamental picture, which continues to be quite positive as the economy repairs from the damages of the Covid crisis.
More proof of that was put on display this past week, including the sixth straight jobless claims report under 300,000. Even more impressive are the results in the manufacturing sector, which is considered by many to be the leading indicator for the overall economy.
On that front, we got a robust 39 reading for Philly Fed last Thursday, up from 23.8 last month. Even better was the forward looking New Orders component, which was off the charts at 47.4 (again, anything north of 10 is impressive in these reports).
On a national basis, the PMI Flash report tells us today that all is well in manufacturing with a 59.1 reading, up from 58.4 last month (here we should cheer anything above 55). Then, on the services front, we saw an almost as impressive 57 reading.
To sum up, the economy continues to improve. Combine that with a still very low rate environment and stocks are the best game in town. And once this consolidation period is over, stocks will likely surge to new highs, with 4,800 being quite likely by years end. Even 5,000 not out of the question, depending on how much “Ho! Ho! Ho!” the Santa rally has in store for us.
Learn more about Steve Reitmeister at StockNews.com.