There is no doubt a pullback is taking place as the S&P 500 (SPY) is a good spot off the recent highs found at the end of July. Since then, the large cap index has given back around 4% with small caps and other Risk On positions seeing even worse results.

The key questions at this time are: Where is bottom? And when will we get there?

We will explore these vital topics in this week’s Reitmeister Total Return commentary.

Market Commentary

We are going to tackle commentary in reverse order today…first explore the price action, then talk about the fundamentals driving price.

As noted above, stocks topped out near 4,600 at the end of July. Since then has been an ongoing process to find bottom:

Moving Averages: 50 Day (yellow), 100 Day (orange), 200 Day (red)

Stocks cut through the 50 day moving average like a hot knife through butter and have not looked back. Clearly a deeper wash out was needed given five straight months of excellent gains.

Next up we had psychological support at 4,400. That too did not hold. Then came up just short of breaking back above on Monday followed by another failed test on Tuesday.

That makes 3 straight closes below 4,400. This means we now likely have to contemplate whether the 100 day moving average at 4,305 will hold as support and bottom of the range. We got fairly close on Friday with an intraday strike down to 4,335 before a bounce ensued.

My gut tells me it wouldn’t take much to dive another 2% to test that 100 day moving average. That likely is as far as we need to go given the fundamental story in hand.

Meaning that a test of the long term trend line (200 day MA) at 4,136 seems likely overkill at this time. Probably the 100 day moving average is as far as we need to go.

Getting as low as the 200 day moving average is plausible ONLY if the economic events from here come in much worse than expected. Thus, a good time to switch to the fundamental picture of the market.

Fundamental Picture

My main thesis is that we have a long term bull market unfolding as the Fed does look on track with a soft landing as they bring inflation down to size.

DON’T thank the Fed…they have been doing their level best to create unemployment and a recession.

The main reason a recession has not unfolded…and likely won’t happen, is that the 2-4 million early retirees during Covid created an employment shortage. Anybody who wants a job can pretty much find one leading to historically low unemployment rate that has not buckled under the pressure of 1.5 years of intense rate hikes.

Unfortunately, this thesis includes the fact that bulls got way ahead of themselves bidding stocks up to 4,600 when the economy is still soft and earnings growth is non-existent. This led to an elevated PE over 20 which is too much weight for the current fundamentals to withstand.

The natural conclusion given above is to have a long overdue pullback that properly resets market equilibrium at a more logical valuation. This begets a trading range between likely the 100 day moving average at 4,305 and the previous high of 4,600.

This is a comfy trading range to play around in awaiting the next key catalysts to break out. Most likely that will be a break higher as the soft landing comes together allowing the Fed to lower rates which is strong caffeine promoting higher stock prices.

Yet while in the trading range we are very susceptible to every new headline that could make us go higher one day…and lower the next. So, let’s review the key economic events before us that could provide the next catalyst for the overall market:

8/16 FOMC Minutes: This happened last week. But an important piece of information to weigh against other events down the road.

The actual meeting on 7/25 the Fed clearly started their “dovish tilt”. That being the acknowledgement that inflation is moderating nicely. Plus, they no longer saw a recession unfolding before they were ready to lower rates. However, the meeting minutes had a bit more language about the “potential need” to raise rates further to put the final nails in the high inflation coffin.

Given that the market was already in the midst of a pullback, then this was just another reason to hit the sell button. Yet really, the language of the minutes was no more hawkish than any statement made by the Fed in the past to give themselves whatever flexibility necessary to win the battle over inflation.

All in all, the pathway is there for the Fed to not have to raise rates further and create the soft landing for the economy which leans bullish in the long run.

8/23 PMI Flash: This report rarely makes headlines, but is a strong leading indicator of the trends found in the next round of ISM Manufacturing & Services reports the first week of the new month. Thus, always beneficial to review this announcement to appreciate if odds of recession are going higher or lower. Right now investors expect this reading to be the same as last month at 52 with services in better shape than manufacturing.

9/1 Government Employment Situation: The job add expectations continue to ebb lower as the Fed rate hikes slow down the economy. But gladly has not tipped over into negative territory that would raise the unemployment rate…and risk of recession. Right now, the forecast calls for 180,000 jobs added which would be a very “Goldilocks” outcome where the unemployment rate would stay low. On the other hand, not so many jobs created as to heat up wage inflation that would concern the Fed.

9/1 ISM Manufacturing: This has been the weakest part of the economic picture with 9 straight readings in contraction territory (below 50). Right now, it seems that June may be the worst of these readings with July a notch higher…and the August reading on 9/1 expected to be another step in the right direction.

9/6 ISM Services: This is the larger, and healthier part of the economy leading to the positive GDP readings. It is currently expected to be somewhat in line with last month’s 52.7 reading, which is modestly in expansion territory. Yet I think the impressive mid month reading for Retail Sales may lead to a topping of current ISM Service expectations.

9/13 Consumer Price Index (CPI): Inflation reports are the most telling of what the Fed will do with future rate hike decisions. Gladly this key inflation report has been moderating faster than expected for quite some time. Thus, that positive trend staying in place will be key to reignite bullish sentiment. And will have a fair amount to do with the next item…

9/20 Fed Rate Announcement: Right now, investors place 85% odds of the Fed pressing pause on rates. And yes, this appears to be the pattern going back the past few meetings (hike > pause). Plus the tenor of what was said at the last announcement combined with inflation reports since then came coming under expectations.

As always, what Powell says at the press conference has much more impact on the market than the initial rate decision. What investors will be looking for is whether the dovish tilt that started in July will be more or less dovish this time around. Obviously…the more dovish it sounds for the future…the better it is for stock prices.

Trading Plan

Fundamentally we are in a bull market. And technically in a bull market because we are well above the 200 day moving average. But yes, stocks were overdue for a stiff sell off which is taking place now.

Now we are just trying to find bottom. Maybe already found it…but sense a test of the 100 day moving average at 4,305 could unfold.

But even at current prices we are in a “buy the dip” scenario as the market will likely retest 4,600 early in the Fall. Then have a good shot for Santa Claus rally to help close out the year taking a shot at the all time high of 4,818.

Now we just need to consider what are the best stocks & ETF’s for this environment. And that is what the next section will tackle…

What To Do Next?

Discover my current portfolio of 6 stocks packed to the brim with the outperforming benefits found in our POWR Ratings model.

Plus I have added 5 ETFs that are all in sectors well positioned to outpace the market in the weeks and months ahead.

This is all based on my 43 years of investing experience seeing bull markets…bear markets…and everything between.

If you are curious to learn more, and want to see these 11 hand selected trades, then please click the link below to get started now.

Steve Reitmeister’s Trading Plan & Top Picks >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return

SPY shares rose $0.35 (+0.08%) in after-hours trading Tuesday. Year-to-date, SPY has gained 15.43%, 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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