The market has been up, down, and all around since last week's commentary, states Steve Reitmeister of Reitmeister Total Return.
That's because bulls and bears are slugging it out for dominance during this "Dazed and Confused" phase for the market. What does that mean? What happens next? What should an investor do about it? We will explore the answers to each of these pressing questions in this week's Reitmeister Total Return commentary.
Now let’s take a step back to last week’s commentary where I outlined four possible outcomes for the market after the very important Fed rate announcement on Wednesday, February first. Indeed, we landed on the least attractive of which. That being...
Scenario Four: Dazed & Confused
This is where the Fed gives mixed signals. Still hawkish for a long time to save face given previous statements. And yet do tip their hat a little to moderating inflation. This gray area leads to a trading range until investors have more facts in hand. I suspect that 4,000 is the low end with 4,200 at the high end. This comes hand in hand with a ton of volatility as each new headline has investors recalibrate the bull/bear odds.”
The market since then has lived up to every single syllable of the above expectations. Especially the part about the volatility that comes after every key headline. Raging higher after the speech
Tumbling down Friday and Monday after the unemployment report came in way too hot pointing to the need for the Fed to stay vigilant against inflation a good while longer. And then raging higher again today after Chairman Powell’s interview at The Economic Club of Washington DC with me he just reiterates the point that inflation is too hot and the aforementioned employment report only confirmed that notion. This prompts him to keep rates elevated for much longer than most investors appreciate.
Heck, he even stated that this surprising strength may lead them to be even more hawkish than previously stated. Perhaps that means higher than 5% rates. And perhaps it means they will be at it longer than the end of the year. Perhaps both. These ideas are very hawkish, increasing the odds of recession, and making the Tuesday rally borderline insane. But then again, such was the oddity of the reaction last Wednesday when he said virtually identical things.
Looking ahead the main headline catalysts for stocks will be the following:
2/14 Consumer Price Index
2/15 Retail Sales
2/16 Produce Price Index
That means there is a bit of calm before the next headline storm and thus expect stocks to keep banging around in the 4,000 to 4,200 range til then.
What Is So Special About 4,200?
The official definition of a new bull market is when you rise 20% from the lows. In this case, the lows from October were 3,491 x 20% = 4,189...which basically equates to 4,200. Note how we flirted with that level a few times this past week only to find too much resistance.
Here is our game plan from here...
Right now, I see a 65% chance that we devolve back into the bear market making new lows in the months ahead. But 35% chance of a soft landing that makes way for the next bull market. This explains why the Reitmeister Total Return portfolio is currently 36% long the stock market with a blend of Risk On and Risk Off positions.
If and when the bear market comes back with a vengeance, as likely signified by a break back below the 200-day moving average (3,947), then we will get back into our bearish hedge that so successfully gained nearly 7% from August 2022 through year-end as the overall stock market slumped.
On the other hand, if instead, we break above 4,200 in a meaningful way, then the odds of a bull market will have increased...and we will want to come along for the ride by moving up to 50-60% long the stock market. The new additions should be of the Risk On variety (growth companies at discounted prices with impressive POWR Ratings).
I will end by sharing this analogy.
The investment journey is often like going around a Grand Prix racetrack. Lots of twists and turns make us become cautious and slow down. But right after the turns comes the straightaway where we can put the pedal to the metal with greater confidence.
Indeed this is a heck of a tight turn right now as we could break north with the bull market or get back on the rougher bearish detour. So, hold onto the steering wheel tight right now as there is likely a straightaway on the way that will make our lives easier...and our wallets fatter.