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| Dear StockNews Member, Stocks rallied this past week on the news that a debt ceiling showdown is likely to be averted. To that I say a big, hearty... DUH! That’s because politicians never leave their finger in this light socket for long. It is always magically resolved in the nick of time. When the smoke cleared from this rally investors realized they do not have the resolve to truly break into bullish territory above 4,200. This likely means more limbo and trading range lie ahead as investors await a REAL catalyst to resolve the bull/bear debate once and for all. Let’s review why this is the case...and what potential catalysts are on the calendar that could produce the next big move for the stock market. Market Commentary The short version of my current market outlook was nicely summarized as follows from my previous commentary: “There has been a tug of war taking place all year between bulls and bears. It would seem that bulls grabbed the early lead given how stocks shot up near 4,200 by early February...but since then stocks have traded in a narrow range where bulls & bears seem fairly balanced. (Read the full version of the above commentary here: The WORST Stock Market Ever- Part 2) Even though stocks rallied this week up to 4,200. Truly nothing has changed to convincingly win the bull/bear battle. In fact, most of the substantive recent news has been negative. Like Retail Sales coming in at only +1.6% year over year. When you remove +4.9% for inflation (CPI) it shows a -3.3% drop for US retail. This fits in with the general high inflation narrative that consumers become fearful of waiting to purchase products that leads to a seeming boom in GDP in the near term. This is followed by an economic cliff as demand has been pulled forward. Indeed, that precursor to recession may be happening now. Those looking to the Fed for signs of a pivot to lower rates should be disappointed by what they heard this week. First was the Dallas Fed President Logan who said current data does not justify pausing rates hikes yet. Next on Friday morning Chairman Powell was giving a speech reemphasizing that inflation is still far too high and that the Fed would stay “steadfast” in their goal to lower prices. This means that bulls should once again be disappointed to hear the hawkish resolve the Fed is likely to reiterate at the next announcement on June 14th. But even that is not enough to win the day for bears either. Investors will need to see unequivocal proof of a recession on the way for the bear market to reemerge. This would have stocks breaking below the 200 day moving average at 3,976 and likely retesting the October lows of 3,491...if not lower. (That break below 3,976 should be your trigger to get more bearish). This has us back on “catalyst watch” for any events that end this bull/bear stand off in convincing fashion. Here is the roll call of the key events on the calendar that could serve as that catalyst: 5/25 Jobless Claims- This will not be strong enough by itself as investors would look for collaboration from the 6/2 Government Employment Situation report. However, if Jobless Claims start to approach 300,000 per week, then historically that has pointed to the time that the unemployment rate is about to rise for quite a while. 5/31 ADP Employment, JOLTs- 2 other jobs reports that often serve as leading indicators of what is in store with monthly Government Employment Situation. 6/1 ISM Manufacturing, Jobless Claims- there have been MANY weak readings for ISM Manufacturing without truly signaling a recession was at hand. However, this is still one of the key monthly reports to monitor on the health of the economy. 6/2 Government Employment Situation- Job adds are expected to keep ebbing lower down to 180,000 this month. Note that population growth demands 150,000 job adds per month to keep the unemployment rate level. So, any movement under that mark could have investors predicting even worse readings ahead. Also, many eyes will be on the Wage Inflation component as that sticky inflation has been clearly bothersome to the Fed. 6/5 ISM Services- Has been in positive territory at 53.4 last month. But if that cracks under 50 into contraction territory it definitely would increase the odds of a recession ahead. 6/14 Fed Meeting- More investors are expecting that they will pause raising rates. But that is quite different than pivoting to lower rates which they still claim is a 2024 event. So, the Powell press conference that follows the rate hike decision will be closely watched for clues of what comes next. All in all, I still believe we should take the Fed at their word that a recession will take place before inflation is properly tamed. And once that Pandoras Box is opened...then things can get ugly in a hurry with much lower stock prices on the way. That is why I am not tempted to join the bulls even as they are knocking on the door with a potential breakout above 4,200. Reity, are you saying its not possible to break out above 4,200 now? I am not saying that because with the stock market anything is possible. However, looking back at history there have been many false starts to a new bull market that later failed...and failed miserably. Most notable is the greater than 20% rally from November 2008 through early Jan 2009 that technically marked a new bull market. This sucked in a lot of excited investors only for the bear market to return with a vengeance with lower lows on the way (focus on the arrows in the chart below).
So just breaking above 4,200 for a little while without a clear fundamental catalyst would not entice me to chase stocks because of the great likelihood of it being a “suckers rally”. Yes, at some point the emergence of the next bull market will make a lot of sense. Right now it simply doesn’t given the still high odds of recession ahead which begets lower corporate earnings and lower share prices (the market has always worked this way...and suspect always will). So, please continue to stay balanced with in your portfolio which means about 50% long stocks. Then when the CLEAR bull or bear catalyst emerges, then make the rest of your moves to join that bandwagon. What To Do Next? If you have enjoyed less than spectacular results over the past few years...and are unsure how to move forward...then please consider finding out what my 43 years of investing experience can do for you. This means getting access to my current portfolio of 8 hand selected trades that is squeezing this lemon of a market and producing appealing gains for our members. On top of that I will keep you posted with changes in the market outlook...and what that means for our trading strategy. Then employing all the tools at my disposal to get the wind at our back speeding forward to outperformance. The cost to see these 8 trades in the Reitmeister Total Return portfolio, and all the market commentary, trading strategies and top picks to come, is only $1 for a 30 day trial. So don't delay, get started today! Start My Trial 30 Day Trial Now > Wishing you a world of investment success!
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