For the past couple weeks, I have been stating that it is not yet time to buy the dip. And yet stocks just keep climbing back towards 4,200 and seem hungry for more, says Steve Reitmeister, editor of Reitmeister Total Return.
Am I wrong? Or am I early? That will be the focus of this conversation.
Market Commentary
Let’s talk about facts, then get around to opinion and strategy.
The market did test the 50-day moving average on May 19 when it swung down to an intraday low of 4,061. However, it never tested 4,000 like I suspected nor crossed under to take a shot at the 100-day moving average 1% below that level.
Since hitting the 50-day moving average the S&P bounced for four straight sessions before taking a minor breather yesterday. Yet for a second straight session it did spend part of the day flirting above 4,200.
Do remember that the market spent a full six weeks consolidating under 4,000. This period from mid-February until early April came with many pullbacks and violent sector rotation. Then it built up enough energy to sprint to a new record high of 4,236 by early May.
By comparison, we have only spent a modest two weeks in consolidation mode under 4,200. Yet have little doubt that the sector rotation has been mighty violent. That shows up in the haircuts taken by many of the most hyped groups like tech stocks. And let’s not forget the air taken out of the Bitcoin bubble (more on Bitcoin further below).
At this stage I am not waving a white flag on my lower stock price prediction. I still very much believe that we are in consolidation mode with more time to spent under 4,200 before the bull market makes its next meaningful surge higher.
So at this time the key technical levels are as follows:
4,100 = 50-day moving average
3,973 = 100-day moving average
3,732 = 200-day moving average
So yes, I still believe that the 100-day moving average will be tested before all is said and done. However, there is not much need to test the 200-day moving average at 3,732. That seems like too dramatic a drop with such a long-term bullish back drop (low rates + improving economy).
To be clear, we could get that low. I just suspect we won’t because there should be too many willing buyers under 4,000 to prevent that from occurring.
So this gets us back to the focus of our commentary; Am I wrong? Or just early?
The reality is that both are possible answer. I suspect that I will be proven right in time and that is why we still have a modest store of cash.
However, my 40 years of investing has taught me that no matter how sound your logic, you can still be wrong...and sometimes VERY wrong. And thus, you have to weigh that into your investing strategy.
A good analogy would be like playing chess, only caring about your offensive moves. But remember there is an opponent and you have to be as focused on playing defense or you quickly lose the game.
A firm understanding of this notion leads to only taking more modest bets. Like only having 21.5% cash at this time instead of 50% or more like some hyper aggressive traders are willing to do. Heck, there are people right now who actually have no long positions and are just shorting the market.
My method of taking smaller market timing bets allows me to benefit in the likelihood that I am right, but not unduly harmed if I am proved wrong. Along with that is having a contingency plan to unwind the position if indeed I am on wrong side of the action.
Here is the worst case scenario. Let’s say the market does soon break out above 4,200. Terrific. Then the vast majority of our portfolio already invested in stocks will be racing ahead. And we will quickly deploy the rest of the money into three new positions and not really be left behind.
What is most interesting at this time is that even with the S&P back at 4,200 that many of the stocks on my radar continue to head lower (like some of the industrial/materials picks). That is a sign that the broad market index is not showing the violent sector rotation action happening underneath. So, I still like the odds of deploying our spot of cash on some great buy the dip opportunities even if the bull keeps running ahead.
Now let’s shift gears back to the improving economic picture which continues to provide a favorable backdrop for the long term health of this bull market.
Last Thursday we got a double dose of goodness with Jobless Claims making another move lower to 444K. This got followed by another strong regional manufacturing report in the 31.5 showing for Philly Fed. Truly any reading above 10 is quite favorable.
The good economic vibes were echoed the next day when the PMI Flash report leapt from an already impressive 63.5 up to 68.1. Services was the strength of this report with that component rolling in at 70.1. To be honest, I don’t ever remember a reading that high for this key report.
Yesterday we got a slew of additional positive readings. Yes, home prices are on the rise (and in my book a good part of the inflation story that is not being properly represented in current Treasury rates...but should be when the Fed stops overly manipulating the bond market).
Also Consumer Confidence is strong. It certainly helps that the government is picking up 1/3rd of consumer spending with their stimulus programs. And by the government picking up the tab I really mean that you and I and future generations will be paying for this for the next 50 years. I will get on my soapbox about that some other time.
Lastly, the Richmond Fed Manufacturing index of 18 is not as impressive as the aforementioned Philly Fed...yet clearly another sign of robust economic improvement.
Long story short, economic activity continues to improve which helps with the long-term bullish backdrop even if there is good reason for short-term pullbacks and volatility.
Now let’s talk about Bitcoin. Long time RTR members know that I have been mum on the subject in my written commentary. Yet there has been a comment here or there in the Q&A section of monthly webinars that this value investor disdains this type of investor speculation. And won’t be touching Bitcoin with a 10-foot pole.
Gladly others are starting to see the error of their ways as Bitcoin is down 41% from the peak. And other frothy investments in speculative growth arenas are also seeing some air let out of their bubble.
Don’t read this wrong. In fact, I believe this is an incredibly healthy sign for the long-term bull market that we are squeezing out excesses now.
This form of self-cleaning often prepares the market for a healthy broad based future advance with a focus on growth at a reasonable price type stocks. Yes, that is my jam...and am hopeful it will be beneficial in letting us expand our lead over the market later this year.
Portfolio Update
Sector rotation = mixed results for overall market = mixed results for our portfolio of stocks and ETFs.
As you know from the past, I recommend folks avoid reading ANYTHING into the price action of the individual stocks. In general, they are just being swept up in the winds of the overall market. Meaning there is no change in their future outlook. Just a change in the short term price picture.
This should embolden us to hold on to our most attractive stocks through this volatile period which expectations of higher prices when the storm clouds pass.
Now here are some additional insights on our individual picks:
Boyd Gaming (BYD): Grabbing shares on the dip under $60 is looking pretty good at this time as it has closed higher for two straight sessions. Most impressive of which was being the biggest gainer for RTR yesterday as the market endured a rough risk-off session.
Indeed if there is more downside for the overall market, or nasty sector rotations, then BYD will likely find itself back under $60 again. However, with $80 being a more reasonable fair value then we can easily slough off these short-term hiccups for the long-term jackpot that should roll our way. (BC snapped up at the same time also had a positive session).
Insperity (NSP): Finally breaking back above $90 and encouraged by recent momentum. Still believe that $100+ is a more rightful perch for this stock coming into the next earnings report given the clear improvements in the employment picture.
Semiconductors (AVGO & KLIC): We have been through tech sell offs before and clearly understand that the chip stocks endure outsized beatings. But we also understand that when the group bounced back that these shares will lead the parade higher. Indeed, that has been the case of late and glad we did not sweat the ugly red arrows that beset these shares in the recent past. Just keep your eyes fixed on AVGO being worth $550 by years end and KLIC $70+. That is where this train should be headed no matter how bumpy the tracks get.
J2 Global (JCOM): These shares don’t impress much on the up days. Gladly its resilience on the down days is what helps keep shares ahead of the pack. And now we see shares make new highs this week and briefly topped 80% since inception. Still like the odds of 100% gain before the next earnings report.
Learn more about Steve Reitmeister at StockNews.com
