Who Is in Charge - Bulls or Bears?

The bulls charged up to the 200-day moving average of the S&P 500 (SPX) on Monday 8/15 and then ran out of steam, states Steve Reitmeister of Reitmeister Total Return.

Since then, the bears have been in charge with stocks falling about 200 points from last week's high.

So, who is in charge...Bull or Bears?

And just as importantly...how does the answer to this question affect our trading strategy?

These vital topics will be at the heart of this week's Reitmeister Total Return commentary.

Market Commentary

Bulls will say the recent sell-off is nothing more than healthy profit-taking after an impressive 18% run up from the June bottom. And that this is just a little breather before the next leg higher.

Bears will say that the past rally was nothing more than your typical bear market rally also known as a bear trap. And that as investors take their heads out of their backsides they are realizing that conditions are still quite bearish.

For example, as if there were not enough inflationary pressures, now we discover that there is a worldwide drought with water levels on major transportation rivers around the world (like the Yangtze in China and Rhine in Europe) at scary low levels.

What’s the problem?

Less rain is bad for agriculture production, which means lower supply and higher prices for food

Major waterways with lower water are harder to navigate, which equals higher transportation costs.

This does not help the picture for those that believe last month's slightly lower inflation readings were a sign that we were soon on our way to solving this problem without as much Fed intervention that would likely damage the economy. The Bloomberg Commodity Index Total Return is surging higher. And now 11% above the July lows when investors were so buoyant on the idea that inflation was moderating.

The still evident inflationary pressures are still a big part of the economic problem that has yet to wreak its full havoc on the economy. But also on the price action front here are some stats I found in a recent SeekingAlpha article on Bear Traps (aka Bear Market Rallies...aka Suckers Rallies).

“Bear trap? This stock market rally echoes bear market moves going back to the onset of the Great Depression, according to BofA Securities. The average S&P 500 gain in 43 bear market rallies of more than 10% going back to 1929 is 17.2% over 39 trading days, while in this case, it is up 17.4% in 41 days, making it a 'textbook' example. This time around, 30% of the S&P's gain is due to just four stocks—Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), and Tesla (TSLA)—noted strategist Michael Hartnett, adding that another risk for bulls is that whether the "Fed knows it or not, they're nowhere near done."

The proof of the above shows up in obvious detail in the many webinars I have done showing the chart patterns of previous bear markets. Painful drops followed by sharp bounces (rinse and repeat many times 'til the final capitulation bottom has been found).

There is virtually nothing about the recent bottom in June that feels like a capitulation bottom. Meaning where all hope is lost and from that darkest hour a true and lasting bottom has been found.

So who is right about market direction...bulls or bears?

For as bearish as I am, I have to admit that the full evidence is not in hand for the bears to be proven victorious at this moment. However, the same is true for the bulls. They need to prove that the Fed can tame inflation without overly harming the economy. This is a high-wire act they have failed out more times than succeeded.

This leads to the idea that we are locked in a trading range between the 100-day moving average on the low side at 4,086 and 4,315 which denotes the 200-day moving average. Every move inside the range is meaningless noise.

Meaning that no matter how impressive the rally...if inside the range, then still not proven bullish.

And no matter how intense the drop like Friday or Monday...if still in the range, then it proves nothing for the bears.

The fact is that we could be locked in this range for a while for the investing jury to review all the key evidence. And actually, that would be a logical and healthy move. So don’t be surprised if we are in this range for several weeks or even a few months.

It is for this reason that I continue to advocate our hedged strategy which is perfectly built for range-bound behavior. Our hedge has generated an impressive +2.12% gain since going into place Monday 8/15 all the while the S&P has slipped -3.92%.

The beauty of this strategy is how easy it is to swing bullish or bearish when the final verdict is in hand. If bearish, then sell off the long stocks and then enjoy the gains that unfold in the inverse ETFs.

And if indeed the bulls prevail, then do the opposite by selling the short positions so that the gains from the long stocks are allowed to shine through.

As I have been saying, our strategy is sound. Now let the chips fall where they may.

Current Portfolio Holdings

Portfolio Update

There is no hiding from the fact that July and early August were unkind to our portfolio as our impressive lead over the stock market slipped through our fingers. But if you drive your portfolio while looking in the rear-view mirror then you will no doubt crash into a wall.

The key is to put your ego aside and make the best possible decision for what likely lies ahead. In our case, we had to give a nod to the bullish energy at play and thus not be so bearish However, it would have been a grave mistake to have gotten gung-ho bullish coming into the 200-day moving average indeed served as a recent market top.

Right now the creation of the hedge was a great choice. This goldilocks strategy has gone up for six straight days since going in place. Four of those days were down for the overall market and two were up. Meaning it has passed the test in all market conditions to date.

Will it keep up this 100% win rate?

Heck no!

That is just never in the cards when it comes to investing. But I do very much believe that it continues to have us on the right side of the action as we grind ahead week by week.

(Just a reminder that we are employing a hedged strategy with equal allocations to inverse ETFs and long stacks packed with the outperforming elements of our POWR Ratings. This plan went into place on Monday 8/15/22 as the market was peaking from the recent bull run while strong hints of a long-term bear market still linger in the air.)

Now let’s take a gander at what is happening with our various portfolio positions:

Higher Rates Trades (RISR & SJB): We didn’t talk about these much for a while as the trend certainly cut against us. Gladly the tide is now changing back in our favor this past week and I suspect it will be true for some time longer.

There is just no way to look at current inflation this high with a super hawkish Fed and not appreciate how rates will go higher across the board. However, it is when the winds of recession are in the air again that our play on higher junk bond rates in SJB would seriously take off as investors will demand much higher rates from the debt of these borderline companies. That is the way it has ALWAYS played out in past recessions. And why I continue to pound the table on SJB at this time.

Inverse ETFs (PSQ, RWM, SH): If my outlook were bullish, I would never have put RWM and PSQ into to the hedge as the small caps and techs have been the leaders of the recent bull rally. So with the idea that down was more likely than up...then those groups were ripe for profit taking which is why those ETFs have produced much higher returns than the vanilla choice of the S&P 500. This will likely stay true during the trading range phase and if dip back into bear territory. However, if the bull premise does start to win the day, then I will kick them to the curb immediately.

Best Stocks (ACI, ICL, PPC): Why is ACI the best stock since being added? Because the market has tumbled and only the most conservative picks would outperform in that environment. This is exactly why I picked ACI given my still bearish bias. Note that on the days the market rallies, these will likely be the worst stocks in the portfolio.

PPC should be similar to ACI...but not as consistently accurate.

And depending on the day ICL also falls into this more conservative group since tied to agriculture. However, it is also an Israeli company and foreign exposure can lead to mixed outcomes depending on the day. Today that worked out great with a +2.5% showing and in the plus column since inception.

Worst Stock (STM & JBL): It’s the inverse logic as above. STM is doing poorly because it is the most aggressive pick in the litter. So why not sell it you ask? Because I think we will be sloshing around in a trading range for a while and on the up days STM will outperform. However, if and when we get clear indications that the bear market is back in full swing, then STM will be the first stock out the door.

JBL is the next more aggressive stock in the portfolio. That was a positive early when it got a new Buy rating from Credit Suisse. Since then that knife has cut against us as the market headed lower.

Closing Comments

The flow of hate mail I received in early August has ground to a halt. My only curiosity is whether that’s because you guys appreciate the efficacy of the hedged strategy in place...or that you have tuned me out altogether and went gung ho bullish at precisely the wrong time.

Investing is not easy. In fact, it is often highly illogical and downright maddening. However, as I said earlier, you can not drive while looking in the rearview mirror. Continue to look at the information in hand as objectively as possible. That will generally lead you to the best solution.

I very much believe that we will be locked in a trading range for a while and then will have clear reasons to break bullish or bearish depending on how well the economy weathers ongoing inflation and a hawkish Fed. That is why the hedge is so well suited for the times and hope you can hear that message no matter what transpired the previous couple of months.

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