Just as stocks fully recovered from the 3% inverted yield curve scare of last week…here comes the next tidal wave of selling.

Actually there was 4 separate things that happened that culminated in this dramatic decline. We will review them all below followed by the more vital discussion of where stocks are headed next and how best to manage your portfolio.

Wave 1: Thursday morning the PMI Composite Flash report came in shockingly low at 50.9. Even worse is manufacturing in contractions territory and 10 year low at 49.9. This erased early morning gains as stocks retreated to 2900. There stocks found support and amazingly ended the session modestly in positive territory.

Disaster seemed averted til Waves 2, 3 and 4 drowned investors Friday morning.

Wave 2: Before the market opens Friday China retaliates with a new round of tariffs on US goods set to go into effect at the same time as our new tariffs on their goods (September 1^st and December 15^th). This had shares bending towards another breakout below 2900 at the open. But again, stocks substantially cut losses on a morning bounce.

Wave 3 and 4: As I have recently stated, we are always 1 Tweet Away from a Nasty Correction! Sure enough we got 2 Tweets back to back that pushed shares over the edge with a breakout under 2900 (ending the session at 2847).

The first Tweet was about whether Powell or President Xi was our biggest enemy. This is unprecedented ground on two levels. First, Presidents rarely comment on the Fed let alone go on the attack in such a public fashion. Second, to use the term “enemy” with President Xi may have been more than what the President meant to say. Or perhaps…it is EXACTLY what he wanted to say. Because the very next Tweet was about urging US companies to find alternatives to buying products from China.

The CLEAR message is that the trade war is escalating once again…which escalates uncertainty…which escalates panicked selling…which deflates stock prices.

So…How Low Will Stocks Go?

I’d say there are 3 lower levels worth contemplating.

2800: That’s because the 200 day moving average stands at 2802.59. You can blend that with how each 100 points on the index is an important psychological barrier for stocks. This spot should provide ample support at first. But if trade war tensions escalate, and recession fears grow, then we have to contemplate the next level down.

2728: This is the intraday low on June 3rd from the last trade war induced correction. Given the similarity in the catalyst for the selloff (uncertainty over US-China trade) then it is very interesting to contemplate a return visit to this level.

2346: This is the Q4-2018correction low before we bounced mightily to start 2019. Investors would have to be pretty well convinced of a looming recession to get back to this lowly place as it is 23% below the all-time highs…and thus would technically be considered a bear market.

Investment Strategy

When you are already this close to the 200 day moving average at 2802…it is begging to be touched (like a moth to the flame). Whether we break lower depends on the next move from the US and China.

The more the trade war escalates…the lower we go.

The more olive branches that emerge…the more stocks will bounce.

As we have learned to date, the most predictable thing about US-China trade policy is just how damn unpredictable both sides have been. To me that means about equal odds of stocks heading lower or bouncing higher.

My response to that is a hedged portfolio with a blend of conservative stocks likely to hold up better under market pressure. Then counterbalance that with inverse ETFs based upon an index of stocks more likely to fall more in dire times…and thus more gains accrue to the inverse ETF.

This is precisely the formula I have in action with my Reitmeister Total Return portfolio where I added 5 conservative large cap income stocks and  2 inverse ETFs that rose +6.23% and +3.14% on Friday.

From here I will be monitoring the trade dispute, economic data and price action closely. Then adjust more bullish or bearish as necessary. Meaning that staying nimble, and basing decisions upon the prevailing winds, is your best bet.

If you’d like more help plotting your way forward in these volatile times, then I’m happy to share more insights and precise recommendations with you. Just click on the link below to learn more.

About the Reitmeister Total Return Portfolio

Wishing you a world of investment success!

Steve Reitmeister

…but my friends call me Reity (pronounced “Righty”)
CEO, Stock News Network

Editor of the Reitmeister Total Return

SPY shares fell $0.07 (-0.02%) in after-hours trading Friday. Year-to-date, SPY has gained 15.26%, versus a 15.26% rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...

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