Markets were tumbling down on the fear of a Russian invasion of Ukraine, states Steve Reitmeister, editor of Reitmeister Total Return.
Because of that I wrote the following in my 2/22 Reitmeister Total Return commentary:
“This is a bull market til proven otherwise. However, it is true that the market doesn’t like uncertainty. And a potential military conflict is an uncertainty. However, at some point it will become certain. And that may include some kind of cold war…or hot war with Russia. And oddly that uncertainty flipping to certainty will be a positive for the market. And that is why we remain bullish. Remember the goal is to buy low and sell high. But if you already bought your shares, then that expression become 'hold low and sell high'. And that is why we will not be shaken off this bull before it runs higher once again.”
Now flash forward to Thursday when the markets tumbled -2.62% at the open on the “shock and awe” of the actual invasion. Yet from that intraday low, stocks rallied +4.23% into a very positive finish the same day. This was followed by a +2.24% gain on Friday. This compelled me to focus the Friday POWR Value commentary to explain why this happened in greater detail.
Two Ways to Explain Recent Market Action
It boils down to the market following two long-held investing maxims:
Market maxim one: Buy the rumor, sell the news.
Market maxim two: The market hates uncertainty.
But then I added the following to appreciate what likely comes next:
“The market is still susceptible to scary headlines coming out of the Russian situation. Everything that sounds like the odds are increasing that the US will be dragged into a real military conflict will be detrimental to the market. And indeed the idea that Russia government hackers are messing with the US economy via cyber warfare will not be favorable for stocks (this is the higher risk in my opinion than on-the-ground military conflict)."
Putting it all together, expect continued volatility in the short run. The downside risk, in my opinion, is around 4,000 on the S&P 500 (SPX), whereas the upside reward with the bull market getting back on track is 5,500 this year. But even if 5,000 is as high as we get in 2022, then you appreciate that upside reward is greater than downside risk. And that is why we continue to keep a bullish bias in place.
Yes, there are scenarios that would harm the US economy and lead to a much steeper decline for the stock market. I think the odds of those are fairly low. But if we did start to tip in that direction then we would move our portfolio into a more defensive posture.
Until then, expect volatility with a bias towards upside action.
Another reason why the bias remains to the upside is that the rest of the economy continues to show healthy signs of improvement. Again, there is virtually nothing about the Russian invasion that stops anyone in the US from living their lives as normal…and thus no real impediment to the economy…and thus, in time, why investors will grow bored discussing these scary headlines and just get back to finding good value in the stock market.
The very healthy ISM Manufacturing reading today of 58.6 goes quite some distance to prove the above point. For those who want to say, “that is a view of the past and not the future,” then behold the even better 61.7 reading for the New Orders component, which shows unwavering commitment on the part of buyers regardless of the threatening headlines they see every day in the news. And no doubt that ISM Services and the Government Employment Situation report later this week will show an unblemished view of the US economy.
So yes, volatility will likely reign supreme a while longer. Just don’t let it scare you to the sidelines only for a third investing maxim to come true: Stocks climb a wall of worry.
And it often climbs that wall very fast. So again, stay invested in healthy companies trading at a discount, for they will rebound with gusto when the bull market finally resumes.
Portfolio Update
360 degree price action for the overall market begets 360 degree price action for RTR shares. Meaning we enjoyed the best of what this week had to offer…and the worst of it. But net-net we are basically flat since the last commentary.
Now let’s dig in with the key details on some of notable positions:
Avid Technology (AVID): Very solid outperformer the whole time that the rest of the market got battered and bruised. And then brutalized today coming into their earnings report. Was that ominous foreshadowing of what was to come?
Heck no!
Strong beat on top and bottom line with upward guidance for Q1 and full year 2022. Does that mean shares will rebound with gusto tomorrow? They should…but as we have seen this earnings season…the initial action is a crap shoot. However, what I am more certain of is that the positives of this earnings report should be a catalyst for shares in the quarter ahead. We just have to be patient for that to unfold.
American Eagle (AEO): This is our last earnings report for AEO this season. Shares got roughed up in the same way that most retail names suffered of late. So there is no ominous signs in the price action to have us worrying about this upcoming report. Hopefully they turn the tide with an impressive report providing a catalyst to get back into positive territory. However, if that is not in the cards, then we will sell our remaining shares and move that money somewhere else.
MKS Instruments (MKSI): Their hasn’t been much good to say about MKSI in a while as it has been tossed around by the recent market volatility. However, the five star analyst at Loop Capital sees good reason to get on board MKSI leading to a new buy rating with $200 target. Hopefully other investors get the message about the merit of this stock and it starts ascending to greater heights. That probably wont happen until the market stops exploring the lows and gets back to testing the highs. This gives us good reason to hold on for that more profitable outcome.
Schneider National (SNDR): Shares were a pleasant outperformer today ending in the plus column while the 12 of 14 positions took it on the chin. I love that this stock rarely is the biggest winner or loser. Just more of a consistent, stoic outperformer. Let’s hope that trend remains in place.
APA Corp (APA): Earnings estimates are on the rise after their earnings report. So too is praise from analysts with most targets in the low $40’s, but am impressed by the top rated analysts at Truist and Raymond James who are not shy to say that is way too low. They believe fair value is more like $50 to $59. And when the company is expected to make north of $6 EPS this year, that is not even a PE of ten. So I would say its quite prudent for us to keep riding these shares higher even as it closes in on 100% gain since being added in September
Closing Comments
No one said the road to investing profits was easy. There are ample potholes and detours along the way. The key is planning out the trip with all kinds of contingencies to deal with these problems as they arise, yet still get to your final destination in good fashion.
I know we all look forward to getting past these obstacles for smoother roads ahead. Until then…buckle up!
Learn more about Steve Reitmeister at StockNews.com.
