(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
After a few weeks of the S&P 500 (SPY) consolidating around 4,200 investors are curious whether the volatility will continue or if we are indeed ready for that next leg higher. My first salvo in that discussion is with the following insights shared in the Friday end of the week note. Here is the key excerpt:
“Previously I stated the possibility of a stiffer correction creating a nice buy the dip opportunity. That is still possible. However, another idea emerging is that this may just be an extended trading range with violent sector rotation. Or what some folks call a “rolling correction”.
This is a scenario where the overall S&P 500 doesn’t move that far under 4,200. Yet group by group they see 10-20% sell offs as noted for Consumer Discretionary and Tech above. Now that idea rolls out to all groups 1 by 1. So in the end, each has been cleaned of excesses and ready for the next bull run higher.
If this is indeed what is unfolding then we will deploy our remaining cash into the best stocks in groups getting beaten and battered to enjoy more upside when they are ready to bounce higher. Still have some pretty attractive targets on my radar and will strike when odds look favorable.”
Indeed the needle for the S&P 500 was stuck on 4,200 today with a basically breakeven session. Yet there was plenty of sector rotation taking place as is evident with healthcare getting slammed with consumer defensive, utilities and technology also in the red.
(Aside: Isn’t that interesting though? 3 of those 4 groups are considered defensive sectors. Yet technology is usually lumped into the Risk On or growth category. But when you think about the FAANG stocks they are in many ways the defensive plays folks cling to when the going is rough. That is why it is truly not shocking they aligned themselves with the conservative picks today.)
On the flipside economically sensitive groups like energy and basic materials led to parade higher today. Plus small caps had a strong session with the Russell 2000 up 1.14%.
This sounds like very bullish fuel on the surface that could lead to the eventual breakout above 4,200. But that is the trickery of the sector rotation at play because tomorrow things could be 180 degrees in the other direction. Meaning we could be battling over 4,200 a good while longer.
This gets us back to the notion of putting our cash back to play not on some big dip for the overall market. Instead it is about buying the targeted dips in the best looking stocks whenever their time to dip has occurred. Indeed I am getting a little bit of an itchy trigger finger and likely to make my next move sometime this week.
Back to the overall market outlook. The ISM Manufacturing report today was very strong. That coincides with strength across many recent reports including last week’s Jobless Claims report moving to a new post-Coronavirus low of 406,000.
Yes that is well above the low 200K readings pre-Covid. But on a trajectory basis we are on the right path. This also bodes well for what we should see this coming Friday with the monthly Government Employment Situation announcement.
Right now expectations call for 635,000 jobs added in the month of May. That would be a quantum leap from the 218K additions last month and maybe get the unemployment rate under 6%.
Let’s pull back to the big picture. It has been several months since there was truly a bad economic report. This makes sense as the economy was already self healing from the Coronavirus inspired recession. And that is the normal picture at the early stages of a new economic expansion.
On top of that the government is providing UNPRECEDENTED stimulus. That gravy train shows no signs of slowing with more spending bills on the way for infrastructure projects. (In fact there are 2 flavors of infrastructure projects as the Biden administration is getting very creative with their marketing labels for these spending bills).
And on top of that the Fed is spending $120 billion a month on Treasuries and mortgage securities to keep rates as low as possible. This trend of low rates, as we have discussed many times before, is the biggest tailwind behind the current bull market. (In depth discussion from March 2021 webinar).
Putting all the pieces together we are no doubt in the midst of a bull market. BUT the easy money from bottom has already been made with the 100% gain for the S&P since the March 2020 lows.
Now we should expect a more tepid pace of returns. And more bull runs followed by extended pullbacks or corrections or sector rotations. Or simply, more volatility.
If you know that in advance, then all the easier to handle it as it rolls your way.
What To Do Next?
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Wishing you a world of investment success!
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
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SPY shares were trading at $420.30 per share on Wednesday afternoon, up $0.63 (+0.15%). Year-to-date, SPY has gained 12.78%, 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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