(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).

Stocks were about to have their 6^th straight session in the red on Tuesday. At the darkest hour on Tuesday the index got all the way down to 3805. Then in a seeming blink of an eye we were back into positive territory closing the session at 3,881.

What the heck just happened?

And why?

And what happens next?

Let’s discuss all that and more in our weekly commentary.

Market Commentary

Today’s main event is to appreciate why the market tanked for 6 straight sessions followed by a dramatic bounce into the close Tuesday. In reading the articles by most of the main media outlets they want to pin it all on whiffs of inflation leading to higher bond rates. Yet positive comments from Fed Chairman Powell today put investor’s nerves about inflation at ease.

We covered this important topic in spades last week to appreciate that bond rates could DOUBLE and stocks would still be the infinitely better value. So really this is a false boogeyman. Let me give you a much simpler, and much more accurate rendition of events.

This is just a classic reminder that Mr. Market does not like when investors become too complacent. Because just when the gains are coming to easy it’s time for a good ol’ fashioned wakeup call.

Those who think that something more “nefarious” is happening will be thrown off the bull by selling their tumbling shares. Those are the weak hands. The reward comes to the rest of us who hold on tight knowing the green arrows are right around the corner.

And for an even simpler answer, the market often needs to digest gains by having a classic 3-5% pullback. So after hitting 3,950 we retreated down to 3,805 today. That is a tidy -3.7% pullback to just above an important resistance level at 3,800. So a bounce was soon in the offing.

That’s really all that happened because the bullish conditions are still fully in place. Here is that quick roll call of reasons as a reminder:

• Low bond rates makes stocks the 3X better value. YES, 3 times better. (It was 4X better until the recent rise in bond rates).
• Coronavirus vaccine + major worldwide drop in cases = investors see the light at the end of the tunnel.
• Overall economic conditions improving at a much faster pace than most experts predicted. That includes corporate earnings well ahead of expectations for a 2^nd straight quarter.

To be clear, rates are indeed on the rise. And we have played that tune like a concert violinist with our two interest sensitive trades up +20.41% and KRE +64.04% in in just the past few months. (Tickers for these 2 trades reserved for Reitmeister Total Return members).

The case for higher rates got a booster shot last week when Yellen doubled down on the call for more stimulus. Not just this round, but also a large infrastructure bill later in the year. Putting all that together, with the other facts in hand, it’s not hard to appreciate how this leads to further inflation. In fact, she even said as much that the risk of not acting with stimulus is much greater than the risk of higher inflation.

This has the 10 year rate all the way up to 1.36%. A big move up from 0.5% back in the summer. But still a far cry from the historical norms closer to 4%.

On the economic front we enjoyed another week of mostly positive news. Going back to last Wednesday the Retail Sales report took a herculean leap of +7.43% year over year. This corresponds with the impressive gains found in the weekly Redbook Retail Sales report.

Then we found out that housing continues to be red hot as lower mortgage rates are leading to a housing boom. However, it’s a bit late for investors to jump on that train as housing is a lagging industry based on old measures of demand. As bond rates have doubled in the past 6 months so too have mortgage rates risen. That trend will continue for a while making housing more expensive every basis point higher from here.

The more telling economic report is Philly Fed Manufacturing Index which, just like its cousin, Empire State, is pointing to serious strength in the sector. After the +23.1 reading for Philly Fed we got more positive news from other regional manufacturing reports like +17.2 from the Dallas Fed and +14 from Richmond Fed.

The more all inclusive PMI Flash report on Friday told a story of broad-based economic gains. Not only was manufacturing hot at 58.5 the services component was even better at 58.9. As I have shared with you guys before, anything over 55 for this report (or an ISM report) is a sign of strong economic improvements.

The great curiosity at this time is whether 4,000 is still a point of major resistance. Or was this pullback “the pause that refreshes” so that the market could build up strength to break above with gusto? We will talk more about that idea in next week’s commentary.

What To Do Next?

Right now my Reitmeister Total Return portfolio is well positioned for where the market’s headed in 2021. Gladly we have been reading the tea leaves well which is why our portfolio is solidly ahead to start the new year:

+3.34% for the S&P 500

+15.09% for the Reitmeister Total Return portfolio

If you would like to see the current portfolio of 14 stocks and ETFs, and be alerted to our next timely trades, then consider starting a 30 day trial by clicking the link below.

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Wishing you a world of investment success!

Steve Reitmeister

…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return

SPY shares fell $1.06 (-0.27%) in premarket trading Wednesday. Year-to-date, SPY has gained 3.45%, versus a % 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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