Our portfolio swelled by 5% this past week...a good notch above the S&P 500 gain...and a good tonic for what ails ya, states Steve Reitmeister of Reitmeister Total Return.
Almost everything went according to our plan with stocks hurtling towards bear market territory at 3,855 before support came and a hearty bounce ensued. Unfortunately, we have seen several three-day bounces this year that did not stop the downward pressure. So it's hard to feel confident that this time is different.
But it does feel different. Why? That vital topic will be the focus of this week's commentary.
Today we should talk about two really good reasons why we may have just seen the end of the bear market scare in 2022.
First, and most importantly is the fundamental outlook. The only logical way for stocks to cross over into bear market territory (under 3,855) is for there to be a clear and present danger of a looming recession.
And yes it is true that high inflation + hawkish Fed = bad soil for stock market gains.
But it doesn’t necessarily equal a recession either.
This means there was ample reason for investors to press pause on the bull market to see what happens next with the economy. In that process they needed to wring out much of the speculative excess in the stock market and stonk market…sorry GameStop owners…playtime is over. ;-)
This put investors in wait-and-see mode for signs of future economic health or decline. It did not help that the initial Q1 GDP reading was shockingly under estimates at -1.4%. That kicked selling into overdrive towards the border of bear market town at 3,855.
Yet as investors looked up at the moment of truth, they saw that the early Q2 economic data does not say decline…or recession.
In fact, as of today the GDP Now estimate for Q2 from the Atlanta Fed just rose to a +2.5% growth rate after the welcome release of stronger than expected Retail Sales & Industrial Production reports. Couple that with another impressive earnings season and there is little reason to fear a recession is in the air…and thus little reason to hit the sell button any longer.
This is the heart of the fundamental story that says we may be closing the chapter on this nasty correction…and don’t have to worry about it devolving further into a downright bear market.
Now let’s flip over the conversation to the realm of sentiment and the technical side of the stock market equation.
4,000 was logical support for stocks as every century mark has been for the index. Yet stocks cut below it like a hot knife going through butter.
From there the decline sped up to reach maximum fear levels at 3,855 (under that = bear market territory). Not surprisingly, the market found support just three points above at 3,858.
This is not a coincidence!
This is professional traders and computers alike saying that there is just no logical reason to switch from bull to bear.
Granted the movement of the market is not always logical. But that is on a day-to-day basis. Over time, logic does prevail, as it did in this case.
We crashed through logical resistance hurtling towards the bear market territory.
That Was Capitulation…That Is Where the Selling Ends and Buying Begins.
Reity, are you saying it's just a gung-ho bull market from here?
We could very well be on the verge of a two or three-week FOMO run where stocks go up nearly every session. Then all of a sudden you have broken back above all key moving averages and we get back to contemplating when new highs will be made. Naturally, the bear conversation fades into the distance.
I sense that is the strongest possibility. On the other hand, I could also see us going into a consolidation period between 3,855 and 4,100. During that time bulls and bears wrestle over the outcome a while longer. But if the fundamental facts remain positive (aka solid economic growth) then even that period will end with a break to the upside.
It is for those reasons that I put four new trades in the portfolio yesterday to lean more into the possibility of stock market gains. So far, so good on that front.
Just to be 100% clear, I am not saying the bear market threat is over. The keys to that outcome lie in the economic data.
If it weakens, and the odds of recession increase, then we will be back on the 3,855 doorstep quickly. However, the longer we go on without that outcome…the more the bull is back in charge…and the more likely that we return to the old highs and beyond.
For now, the risk is to the upside. So if you are sitting on a pile of cash or a large short position, then please reconsider that decision at this time as most signs point higher from here.
Portfolio Update
Last week during the peak of the sell-off we had only five positions in positive territory. That has now grown to eight and not hard to see how more join the party with any extension of this bull run.
Also nice to see another position, RISR, climb up in the double-digit winners club. Hopefully, that club also gets a lot more crowded in the coming weeks.
Now let’s dig in on the specifics of our notable positions:
ZipRecruiter (ZIP): +14.49% on Thursday after a glorious beat and raise plus another +7.79% on Friday…and why it was hard to sell shares into the report when every other signal on the employment market is positive and shares should be moving higher. But that is the toughest part of a correction. Everything is going to decline. Some just more than most. And their decline has nothing to do with their individual merits. Just all babies getting thrown out with the bathwater. And the smaller and higher beta that company is…the more it will sell off during those volatile times.
Now we see the average target for ZIP at $35.50 with a street high of $42 from the Five-Star analyst at Evercore. This gives us good reason to hold on a bit longer to enjoy the full upside potential of these shares.
Four Newcomers:
Bloomin' Brands (BLMN)
Clean Harbors Inc. (CLH)
Dropbox Inc. (DBX)
Shutterstock (SSTK)
It's funny how much difference a day makes. All of our new picks looked pretty bad yesterday as the market pulled back. Worst of all was BLMN, which tumbled Monday along with the entire restaurant group. And yet here we are a day later and BLMN has moved from the bottom to the top of the group.
Long story short, we did not put on these trades for two days…not even two weeks. We are hoping that in the months ahead they stay ahead of the pack and help us carve out more outperformance on the year. Nothing has really changed since Monday’s trade alert…and thus all are still very attractive positions moving forward.
Albertsons (ACI): This one is probably on the chopping block. First, because I hate stocks this boring. But wanted to have onboard just in case this bull run did not emerge and was good to have a more aggressive pick in the mix.
That all sounded great until WMT soiled the bed with their downright awful earnings report. I mean have you ever seen WMT sell off so much in one day? And because of that, it messed up the entire peer group including grocery stores. That explains ACI’s tumble today when the rest of the market was enjoying more joyous green arrows.
ACI will stay on just a bit longer in case this bull run fades and we retest under 4,000. If things do stay on an uptrend, then it’s the next stock out the door.
VanEck Oil Services (OIH): All economically sensitive groups got slaughtered in the last month as stocks fell to their lowest levels. This had OIH down to $242.19. Gladly we held on through the tumble to now see shares +14.25% higher in just four days. This is why you can not focus solely on price action because the bigger they drop…the bigger they bounce when the fundamental outlook improves.
Rising Rate Trades Going Right (RISR): The only thing that derails these trades is the fear of recession which would have the Fed clearly stating the end of their rate-raising regime. They are nowhere near that for much of the same reasons given in the market commentary section above.
I previously stated that 3% rates for the ten-year Treasury were a real possibility this year. How crazy that must have sounded when it was only 1.5% at the time. Now the debate has shifted to whether 4% is in the cards this year. I can’t say for sure…but easily 50/50 odds or better.
So hold on tight to these precious positions as they will continue to outperform the remainder of the year. And yes, if you have not yet put these positions in your portfolio then it is not too late. Do so now before the higher rate train leaves the station again.
Closing Comments
What a crazy past week, but at this stage…do you expect any different from the 2022 market?
Gladly we have done more things right than wrong this year leaving us in much better shape than the average investor. That bodes well for what lies ahead.
