The stock market is in melt-up mode. Going up little by little almost every day whereas the few down days are a bit of a yawn, states Steve Reitmeister of Reitmeister Total Return.

That is how we got to so far above the March lows and are now within striking distance of 4,200. 4,200 is an important level because it symbolizes the start of the new bull market (20% above the October lows). We faltered at that point in early February with a combination of hawkish Fed rumblings plus the emergence of disconcerting developments in the banking sector.

Will this time be different?

Let's discuss the possibilities of what comes next to set up the best trading plan.

Market Commentary

The perfect starting point for today’s conversation is resharing this important point from my commentary a couple of weeks back:

“...the stock market is quite similar to a helium balloon. Meaning that its natural state is to float higher unless it is being held down by a stronger, negative force that pushes it lower.

Please read that again so it sinks in.

Now if we pull back to the big picture, we can easily appreciate that state of floating higher is true because 85-90% of investment history is framed by bullish conditions where going up is more likely than going down. However, we find this picture to also be the case during bear markets when negative events are removed. Consider the start of the the market climbed day by day in January. Perhaps it was because there was really nothing negative to hold stocks down.

Next comes February with an increase in hawkish rhetoric from the Fed which starts to reign in some of the early enthusiasm. Next comes about concerns of a potential banking crisis and stocks get pushed down lower and lower on each wave of negative headlines. This had stocks giving back all the 2023 gains by mid-March with a closing low of 3,855 stocks. Amazingly from there, we have gotten served up a +6.6% rally to where we stand today.

Was it because of something positive?

No...just the lack of more negatives to hold down stocks. That’s all it took for them to float higher once again.”

Now let’s consider this helium balloon construct in evaluating the stock price movement so far in April.

Right out of the gate, we had some negative economic reports like ISM Manufacturing and ISM Services well under expectations. The ADP Employment report also had some concerns that the jobs market was finally ready to roll over into negative territory. This had stocks selling off a little bit early in April back under 4,100. Then on Friday, the Government Employment Situation report showed inline results with an impressive 236,000 jobs added. This took the pressure off the market helium balloon to start floating higher again.

That is not so obvious in the modest gain for the S&P 500 this week. Yet it is much more apparent as we look over at the +1.8% result for the more Risk On small caps in the Russell 2000. The lesson learned by investors over the past year is that it does not pay to sell off whenever you hear about recessionary clouds forming because the actual storm keeps NOT happening. And every drop is followed by a serious rally.

This harkens back to the “Boy Who Cried Wolf". At this stage, investors are wise not to be too worried about the potential for the wolf (recession) to come on the scene. This creates an upward bias. From here I suspect stocks will flirt with 4,200 once again as expectations are low for this earnings season. Typically. those low hurdles are easy to clear pushing markets higher.

Will stocks break above 4,200 in a meaningful way, unlike the last attempt in February? I don’t really know. But the lack of bad news is good news for stocks. So, if that is what is on the menu, then yes, it increases the odds to move above 4,200 and officially being called a new bull market. However, let me share a dose of caution.

What many forget about the “boy who cried wolf” story is that in the end there was indeed a wolf that caused great havoc. But because there were so many false warnings beforehand no one came to the rescue. The point being is that there still very well could be a recession in the future. And if and when it does come stocks will go lower.

Putting it all together I would have an upward bias at this time yet sleeping with one eye open in case a recession does actually come together. But until you see real fangs on that recession...I wouldn’t hit the sell button.

Closing Comments

Yes, things are becoming more complicated. This is why I cannot say with certainty that the deepening of the bear market is still highly likely. But just the same, I cannot wave the banner for a new bull either. This calls for a balanced and nimble approach which our April 1st change of strategy has provided. So far, so good on that front. As clarity emerges on the future direction for stocks so too will emerge a change to our investment strategy to be on the right side of the action. Until then the balancing act remains.

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