(Please enjoy this updated version of my weekly commentary published December 16, 2021 from the POWR Stocks Under $10 newsletter).

Since last Thursday, the S&P 500 is basically flat, but it’s still felt like sellers have remained in control.

This is because other measures are painting a much different picture. Small-caps are down 3% over the last week, while there has been bigger pullbacks in certain pockets of the market.

Even the gains were experienced in a brief spurt and were spread out unevenly. Today started off with some optimism that a low had been put in but it seems another retest is in order.

While, the S&P 500 gave up about 50% of its gains from yesterday, the Nasdaq and Russell 2000 gave up about 90%. Based on this, one more retest of last week’s lows seems in order.

I do believe it will be successful given the overall positive fundamentals and early stage of bull market, but I am prepared with a contingency plan if necessary.

Last week’s Question

So last week, I pondered the question of whether the market’s move higher was a bounce or the start of a rally?

I laid out the case for the rally argument.

And, I was wrong. Well, I am early but in terms of tracking near-term performance, Early = Wrong.

With a rally, we should expect some developments like a sticky advance. Broad participation. Huge gains in the most oversold and beaten down sectors.

These simply are not present. And instead, we have the opposite.

The Conundrum

This period in the markets has been challenging and also a reminder that low-priced stocks are quite vulnerable during a risk-off phase.

In terms of managing a traditional portfolio when the entire universe of stocks is available, staying fully invested during market dips in bull markets is always the best strategy.

It seems that this isn’t the case given that these stocks see bigger pullbacks and also tend to bounce back slower and later, giving plenty of time to reenter even when broader market conditions improve.

So, this is an immediate change that we will be applying to the portfolio in light of broader market conditions. If/when they improve, we can increase aggression.

However, nothing has changed with the overall bullish market structure. The Fed getting more hawkish is a headwind and has affected certain parts of the market. But, it should be overwhelmed by the tidal wave of another quarter with more than 20% earnings growth.

Finally, the market is quite oversold and has reached certain bearish extremes that indicate good buying opportunities even in bear market conditions. And to top it off, we are entering the most seasonally bullish period of the year with the last 2 weeks of December and first week of January.

Interesting Sectors

Last week, I identified 3 sectors that I find interesting – semiconductors, housing, and industrial metals. To that, I will add a 4^th – emerging markets.

Here are brief notes on each:

Semiconductors – After showing so much relative strength, they are starting to be pulled lower by the market weakness. Still impressed by Q4 results so far as all indications are that tech spending and pricing power remain strong.

Housing – Similar to semis, housing stocks are also starting to drip lower after weeks of being disconnected. Probably the sector with the best fundamentals on a pure supply/demand basis.

Industrial Metals – A group that was killed over the summer and is continuing to show relative strength. Seems to have bottomed about a month ago and now trending higher. Some steel and iron ore names up 10-20% while many stocks are down more than 10% over the past month.

The bull case is that these stocks saw corrections of 20 to 30% during the summer but so far there is no slowdown in terms of industrial production or trade that would imply some dramatic earnings slowdown.

Emerging Markets – In a vacuum, a tighter Fed means that emerging markets are weak. This isn’t happening. It’s not a signal to get all-in but it is a reason to keep watching this sector as it’s been a big underperformer over the last decade despite strong fundamentals.

Summary

Are we there yet?

No. I think some more pain is likely especially given the rejection of the latest rally attempt.

But, I do believe the dip is a buying opportunity given the continued, bullish backdrop.

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All the Best!

Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter

SPY shares were trading at $462.48 per share on Friday afternoon, down $3.97 (-0.85%). Year-to-date, SPY has gained 24.91%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

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 Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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