(Please enjoy this updated version of the latest investment insights from the Reitmeister Total Return newsletter).
The refusal of this market to go down in the face of all the evidence to the contrary has forced us to join up with the rally. This makes me a very reluctant bull who has the bear suit “cleaned and pressed” to put back on when the time is right.
Commentary will be on the shorter side today. Not much benefit in the usual roll call of everything that is wrong with the economy only to point out why it doesn’t matter as stocks continue to head higher defying all logic. Truly flirting with bubble territory.
We were forced into the long camp for reasons explored in great detail in last week’s commentary (What If I Am Wrong About the Bear Market?).
I expanded upon it further in the 6/1 RTR Members Only webinar.
This led to a flurry of trades Tuesday to play ball with the current market environment. In the end we have 8 positions that are well dialed into the times (included two that are already up more than 10% in just a few days).
The main catalyst given by most media outlets for the continued rise of the market is enthusiasm over the re-opening of the economy. There is some precedent for that with the traders wisdom that “Less Bad Is Good”.
We discussed this very topic on the 6/1 webinar (19 minutes and 40 seconds into the video). Here is an abbreviated version.
Your typical recession is over a long period of time where there is a vicious cycle of activity that makes the economy grind lower and lower (which is why share prices grind lower and lower over a long period of time). Therefore any improvement in the data, like #s being less bad that before, is considered a sign of recovery. These are the signals that many investors use to see the end of the recession and eventual rise of the next expansion causing a bull market to emerge.
That logic doesn’t hold well this time around. Because our economy was SHUT DOWN for 3 months because of the virus and shelter in place laws. So any re-opening of the economy will look “less bad” than a shut down economy. But what is on the other side of the re-opening is the problem.
Meaning that after the pent up demand from the last 3 months is flushed through the economy things will start looking south once again. That is because we still have WAY TOO MANY unemployed people. And too many others fearful of losing their job. This leads to lower spending which is recessionary. And the downward vicious cycle continues lower from there. (lower spending > lower corporate profits > cost cutting > more job loss > lower spending and the cycle continues to some future lower bottom).
Unfortunately too many investors are falsely clinging to the historical precedent of “less bad is good” that it may take 2-3 months for the rest of the investment world to see the economic cliff on the other side of this re-opening. Until then we have to play ball with the bulls for a while.
Is the ceiling 3,200? 3,300? Or even the previous high of 3,393?
Hard to say for sure. However, I suspect that even the most bullish folks out there right now will have a hard time breaking through the old highs without more serious signs that the economy is truly on the mend and corporate earnings are on the rise.
Speaking of corporate earnings, the latest #s I have seen show that S&P 500 earnings estimates for 2020 were cut from $177 to $120. That makes the PE of the market right now a fairly lofty 26.7 and it would be 28.3 at the previous high.
Rolling back to when all was well with the world the PE was at 19 which is a touch on the high side, but reasonable enough when bond rates are this low and corporate earnings are on the rise. The latter is certainly not the case and thus the current level of PE is a tough pill to swallow from a value perspective.
But why should that stop the rally? (he says sarcastically).
That is where we get back to the notion that this rally is getting a bit “BUBBLY”. And just like the tech stock bubble of the late 1990’s and the real estate bubble leading up to the financial crisis in 2008…they can last a lot longer…and rise a lot further than you might imagine. And that is because they are disconnected from sound logic. Or simply “greed run amok”.
Where does that leave us?
We are forced to be reluctant bulls playing ball by other people’s warped rules. So get prepared to become more long if things get even more bubbly.
Yet also stay vigilant to get more defensive if folks regain their senses about this being the worst economic event in their lifetimes…yes worse than the Financial Crisis…and what that should mean for the trajectory of stocks prices.
Like I said up top, we are pretending to be bulls all the while we have our bear suit ready to put on at a seconds notice.
What to Do Next?
Yes, these are unprecedented times. And thus it should not be a surprise that the market is moving in unprecedent fashion.
So if you are having success navigating these choppy waters, then more power to you!
However, if you are struggling to know the right way forward, then consider checking out my Reitmeister Total Return newsletter.
Right now I am riding the momentum of this rally with 8 well positioned trades that are enjoying ample gains. More importantly, I am sleeping with 1 eye open awaiting the eventual return of the bear market when folks discover that the economic problems are still very much in our midst leading to lower stock prices.
Doing things this way means that we will not be drunk with “irrational exuberance” when the time comes so we can take profits on our current positions. Then sober enough to switch to a more defensive portfolio to profit on the long way down to eventual bottom.
If you would like to see more of my market commentary, and the hand-picked portfolio of 8 trades for today’s market and game plan to get bullish when the time is finally right, then learn more by clicking below.
Wishing you a world of investment success!
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares were unchanged in after-hours trading Friday. Year-to-date, SPY has declined -0.20%, versus a -0.20% 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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