In my last publication in late July, I wrote:
“I am beginning to see some things I like on the price charts and have begun nibbling in with our more aggressive clients the past few weeks. A number of the charts I follow are “challenging” their recent downtrend lines and look ripe for higher prices. Should this type of price action prove itself via the breadth metrics, sentiment, and intermarket trends I would anticipate putting more and more cash back to work in the near future. Either way, I believe the worst of the declines are likely behind us in both the stock and bond markets and feel corporate earnings and seasonal patterns might be coming together to provide the tailwind we’ve all been waiting for!”
Since that writing, the stock market rocketed up posting gains of 16-24% depending on which index you follow from their June lows and gaining back around half of what was lost in the first half of the year. The price action was stunning to watch as the computers and short-term traders got on board and abandoned all sense of rationale driving the S&P 500 to a key technical level, the 200-day moving average. Once that level was touched, they pulled their bets! As expected, the markets initially declined a small amount then chopped sideways.
Last week, all eyes were on Jerome Powell’s speech at the annual Jackson Hole meeting of central bank leaders from around the world. Although the Fed has been consistently telegraphing a tough stance on fighting inflation (i.e., raising rates and tightening money supply), investors were anticipating a “softer tone” out of JP and let’s just say they didn’t get what they wanted. Like a child who didn’t get its way, traders hit the panic button and have continued the selling stampede through mid-day yesterday where they once again reached another significant technical level, the 50-day moving average and began to stall. The last 10 trading sessions have taken back half of the gains from the June lows to the August 15th peak, declining about 8-12% depending upon which index you like to follow.
Summer rallies like we just witnessed are not uncommon at all. While the big institutional “shot callers” are enjoying some family time in the Hamptons, trading volume gets light allowing for short-term traders to move the markets up and down between key technical levels and grab some quick profits. All of this can get exacerbated around options expirations as well but that’s a story for another day…
What’s important to understand is that some fundamental improvements have been made in the economy since the first half of the year providing some further evidence that the market lows set back in June might be the worst of the selling. Of course, new information could change this idea at any time, but we have to work with what we know. There is underlying evidence that inflation has peaked while earnings season is wrapping up and was far better than feared. The US consumer has continued spending and jobs remain plentiful despite the Fed’s tightening. The Chips ACT and some other new government programs recently announced will provide some fuel for economic expansion and companies are continuing to invest in new projects and technologies despite the higher interest rates. Oil prices appear to have settled in a range where producers are comfortable producing and profits are strong. China’s failed Zero COVID policy is still in place, but they have demonstrated their desire to get factories back up and running. The war in Ukraine remains a wild card as the battle rages on with no diplomatic solution in site. Investor sentiment has risen, and longer-term interest rates have settled in a trading range for now.
If I sound overly optimistic, it’s because I am! Just after my last writing we were able to add equity exposure and enjoy the summer rally. As the markets became overbought and approached the key levels mentioned earlier, we dialed back our efforts. The recent pullback in the equity markets affords us an opportunity to bring our extremely high cash balances back towards a more neutral level with significantly less risk than just a few weeks ago. Was yesterday the bottom? Nobody knows for sure but in my opinion, it certainly presents an attractive reentry point for capital that has sat out the rout this year and with a solid risk management plan in place I was comfortable making some changes. During the selling pressure yesterday afternoon, we made significant adjustments to our managed portfolios to buy certain technical levels in the areas I feel now present fair valuations based on historical data. Speaking of historical data- I’ll leave you with this reminder from my June 17th article:
“Typical mid-term election years have found a bottom in the third to early fourth quarter historically and the equity markets have a history of exploding higher over the next several months. According to the Stock Trader’s Almanac, the mid-term election year lows set up “The Sweet Spot” of the four-year election cycle where, historically, the Dow Jones Industrial Average has gained 19.3%, the S&P 500 gained 20.0% and the NASDAQ has posted a return of 29.3% from the midterm year Q4 to pre-election year Q2… Of course, history is no guarantee of future results, but it’s nice to know what the odds are saying!”
Should you wish to discuss the current markets, our strategy, and the tools we use to manage risk or just touch base to see how things are going, please don’t hesitate to reach out to our office @ 843-651-2030. Also, feel free to share these newsletters with your friends and family via email and visit us on our website at www.sabowealth.com orwww.facebook.com/sabowealth.