Stocks have enjoyed a surprising two week rally putting the S&P within striking distance all-time highs. However, I have to question the wisdom of this move with so many cracks showing up in the economic foundation.
Today, I want to share with you all these “cracks” along with details on my strategy to squeeze out profits in this unusual investing landscape.
Manufacturing: The is the most economically sensitive group and often a leading indicator of where the rest of the economy is headed. It has been on a steady decline since the August 2018 over 60 to the most recent reading of 52.1. Even worse is that the competing PMI Manufacturing report is all the way down to 50.5…barely in expansion territory.
Morgan Stanley Business Conditions Index: This proprietary model is very sensitive to where the economy is headed next. On Thursday we learned that it plummeted to the lowest level since the Great Recession and the biggest one month drop on record. Yes, it often spikes lower only to rebound…but still not a feather in the cap for the current state of the economy.
Employment: The dramatic shortfall of the May Government Employment Situation report on 6/7 is easy enough to overlook in isolation. Meaning there has been many one month blips along the way. The reason why this one is more interesting is the growing belief that businesses are having a hard time finding enough skilled labor to fill open positions. Plus rumblings that some hiring is on hold because of the uncertainty of the trade conflicts (more on that below).
Consumer Sentiment: Down from 100 to 97.9 in Friday’s report. The culprit seems to be uncertainty over what tariffs mean for the future prices of goods. This is akin to the way that inflationary pressures can spook consumers.
The Fed & Interest Rates: Yes, they may cut rates…but beware of what you ask for. Meaning that the Fed cuts rates at times of economic weakness. And rarely makes 1 cut…it is typically a series of cuts over time with the stock market usually heading lower in the meanwhile until there is proof of economic improvement.
Let’s also remember that rates are already VERY LOW and that any cut at this stage may have VERY LITTLE benefit. Trust me when I say that we should all pray that the Fed finds the economy is in good enough shape NOT to cut rates.
Trade Wars: There was a faulty celebration taking place with the Mexico deal thinking it translates to a slam dunk for the China deal. Now picture Yao Ming at 7 foot 5 rejecting that shot.
These 2 economic powers are digging in their heals for a longer term fight. This is not just about current conditions. For the Chinese this is an early battle over economic supremacy for the next 100+ years. And Xi can’t get thrown out of office because of a bad economy. Whereas Trump has to worry about the 2020 elections around the corner. So China has more leverage at the negotiating table than previously advertised.
Yes, a deal will be made in time. But I would not expect it anytime soon. And not without some scarier headlines and Tweets that have stocks retreating from their current lofty perch.
My Current Investment Strategy
I believe this two week rally is played out. More likely we settle into a trading range with 2900 being the top and 2800 as a reasonable bottom. Maybe back down to recent lows around 2720.
Or to put it another way, there is more downside risk, then upside potential at this time.
Because of that my portfolio is currently constructed as a hedge. Meaning to short the weakest stock groups and buy the best. This kind of strategy is designed to squeeze out profits no matter which way the market heads. In fact, since being in place earlier this week it has generated a healthy profit while the overall market was basically breakeven.
If I am right that stocks are likely to head lower in the range, then the hedge’s outperformance should stretch out much wider.
Below are links to help you construct your own hedged portfolio:
Reitmeister Total Return portfolio: This is where you will find the precise 3 inverse ETFs and 7 stocks I have selected to create this profitable hedge.
Wishing you a world of investment success!
…but my friends call me Reity (pronounced “Righty”)
CEO, Stock News Network
shares rose $0.14 (+0.05%) in after-hours trading Friday. Year-to-date, has gained 16.25%, versus a % rise in the benchmark S&P 500 index during the same period.
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