Usually, Thursdays are a great day for comments, as Fridays tend to be days of low volatility and volume. Sometimes this is not the case, like today for example. Tomorrow there will be the inflation report and the speech by Chairman Powell in Jackson Hole. Both will be important factors in determining the direction of the stock market (SPY) in the near term. Therefore, today is a good day to focus on more major items, although we will provide some updates on the new bull market versus bear market debate that continues to rage on Wall Street. Read on below for more information….
(Enjoy this updated version of my weekly commentary published August 25)e2022 of the Newsletter POWR Shares Under $10).
For the past week, the S&P 500 (SPY) is down just over 2%, although losses from Tuesday’s lows were closer to 4%.
As we’ve done for previous comments, this remains an in- or out-of-market market, meaning little insight can be gained from looking at the performance of different parts of the market.
As discussed in the intro, this ongoing upswing and tomorrow’s events will play a big part in shaping the bull/bear debate. This debate has dominated Wall Street since the market rally that began in mid-June.
A month ago, I was sure this was going to be another bear market rally. Now I’m less confident and more open to the idea that this could be the start of another bull market.
For a while the discussion was more academic until we hit the 200 day moving average last week. Suddenly things got more real as the market pulled back more than 5% from Monday’s high to Tuesday’s low.
Now we are moving higher from a short term, oversold state, but this move could be ended with bad inflationary pressures or some aggressive comments from Chairman Powell.
Currently, the market seems to be expecting some sort of linchpin from the Fed, or even recognition of the slowing growth and inflation. And it’s also looking for continued weakening in inflation data.
As we discussed before, I don’t think a “Fed pivot” is necessary for the stock market (SPY) to rise, but to materially lower inflation, as one is the prelude to the other.
Instead of speculating about things that will be known in a few hours, let’s shift our focus to some bigger ideas.
Every quarter we get to see what top investors are doing.
Michael Burry of the Big Short is very bearish and has sold all his shares except 1 – GEO, a private prison operator. (A theme we’ve discussed many times).
Buffett appears to be buying the dip while continuing to put money to work. Stan Druckenmiller is turning more bearish now that he has sold large positions in Amazon, Google and Facebook.
George Soros, on the other hand, feels bullish and buys the dip in stocks like Amazon and Tesla.
Bid after bad profit
Qualitative evidence to support the bull market’s argument is that so many companies report poor profits, but their stocks are still being bought.
This is an indication that “weak hands have sold” and strong hands are buying, while bad news may already be reflected in the stock price.
Some examples of these are Nvidia, Target, Coinbase, Walmart, etc.
Watching this happen over and over is one of the reasons I moved out of the bear camp and moved to the neutral camp. And it’s the opposite of what we experienced in the fourth quarter of 2021 and the first quarter of 2022, when companies would crush profits but saw their shares sell out.
Inflation peak versus recession story
Another irony is that falling inflation is bullish, while increasing recession odds are clearly bearish. But both are happening in part as a result of the Fed’s tightening policy.
Looking at it from a global growth perspective, there is a huge deflationary impulse rippling through the economy as the Chinese economy is running below capacity, negatively impacting commodity prices.
It currently faces an energy and water crisis that forces the country to ration power and curtail industrial activity.
In most economic environments, this would be a major problem. In this where inflation is a major risk factor, it has actually been a bit helpful in terms of reducing inflationary pressures.
Growth stocks were sort of a leading proxy for the market. Many of the frothiest, peaked in the spring of 2021, while others peaked later in the year. This was well ahead of the broader market that peaked in January of this year.
Interestingly, the inverse happened recently as many growth stocks bottomed out in mid-May and hit higher lows in mid-June, although indices and most stocks bottomed out lower in June.
Currently, growth stocks have outperformed this rally. One of the reasons is that moderating inflation leads to lower interest rates that place bids below growth stocks.
The other is that these stocks were heavily shorted, meaning shorts are under pressure.
It’s also worth noting that no-profit “junk” growth stocks and high valuations are leading the rally, while more, higher-quality growth stocks are lagging. This could be interpreted as a lack of institutional participation in the rally.
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All the best!
Chief Growth Strategist, StockNews
Editor, POWR Shares Under the $10 Newsletter
SPY Shares. Year-to-date, the SPY is down -11.02%, versus a % increase in the benchmark S&P 500 index over the same period.
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR growth and POWR Shares Below $10 newsletters. Read more about Jaimini’s background, along with links to his most recent articles.
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