As you likely understood from last night's commentary, there is no way for me to watch Chairman Powell's speech yesterday and not be firmly bearish, states Steve Reitmeister of Reitmeister Total Return.
Keeping hawkish policies in place through the end of the year + 12 months of lagged effects + very weak economic data at the moment = ample window to create a recession with job loss and lower stock prices in the months ahead.
On the other hand, I want to share with you this conversation from a month ago that haunted me all night leading to this morning's email. I was asked to provide an answer to the following question: What's one lesson you learned in 2022 that you'll take with you into 2023?
To which I answered: "I finally got bearish in May with the market closer to 4,100. Earlier than most...but later than it needed to be if I focused on the clear break below the 200-day moving average in April around 4,500. Acknowledging that proven signal would have improved my results and will be mindful to heed that warning in the future."
The only way to rectify these two opposing positions is to strike a middle ground. To become less bearish in our portfolio to enjoy more upside if the bulls are correct with their recent rally above the important 200-day moving average.
Just as important is not becoming so bullish as to have the rug pulled from us on a future date when the economy could tip over into recession with stocks descending once again. The solution is to make the following trades that move us to 36% long the stock market from the previously 0% long bearish hedge.
- Sell all shares of ProShares Short QQQ (PSQ)
- Sell all shares of ProShares Short Russell 2000 (RWM)
- Buy 10% allocation to ARK Innovation ETF (ARKK)
Basically, we are selling the most Risk On inverse ETFs and buying one of the most Risk On ETFs. In fact, I wrote up this article in October 2022 talking about why ARKK is one of the best picks for the next bull market.
Note that the most important decision was getting to 36% long. Could have done a little more or a little less. This is good enough.
Plus, I could have accomplished the task with many different combinations of trades. So don't spend too much time thinking about that. If you see another path to get to the same destination, then take it. The key is that we are no longer totally bearish. We are now a shade bullish.
If the wisdom of the bull rally grows larger, we will keep ratcheting up our bullishness in the portfolio. Mostly with stocks with top POWR Ratings. Whereas, if we break back below the 200-day moving average, then we will get back in our defensive bearish hedge once again by selling ARKK and adding back appropriate inverse ETFs.
I absolutely can be a stubborn person with strong convictions. And it would be easy for me to remain bearish given the economic facts as I perceive them.
However, I am also open-minded enough to realize when I am being a hypocrite and going against sound logic. That is why this is the prudent move that gives us plenty of flexibility to change in the future.
Heck, if the bear market started back in earnest this afternoon...then at only 36% long we would lose a lot less money than most. And as we crossed back over the 200-day moving average reverting back to our bearish hedge would have us producing profits as the market descended lower. That is not so bad for a "worst case" scenario.
However, if the wisdom of the crowd creating this rally is indeed correct, then we will be glad that we started to participate in the upside at this stage instead of much later.
In closing, I want to share this valuable lesson.
The investing world is rarely straightforward. That is why there are so many incredibly intelligent players who have well-reasoned views that are 180 degrees opposite of each other. Thus, at its most confusing moments, it is often wise to strike a balance as we are doing today.
It is better to be partially right than 100% wrong!
As time rolls on, and greater clarity emerges, it becomes easier to shift to the wisest course of action. For now, we will straddle the bullish and bearish camps by making the three trades above. No doubt there will be more trades to come.
