Since hitting record highs in early September, stocks were due for a little pullback. This led to a test of the 50 day moving average for the 7th time this year. Meaning this retreat was looking like no big deal.
Then on Monday we broke below that level on ominous sounding news that the largest Chinese real estate company, Evergrande, could be on the verge of collapse with whispers of this being a Lehman type event.
My intraday note on Monday was to “Keep Calm and Carry On”. Meaning don’t panic. Don’t sell. Expect a bounce soon.
So far that advice has been on target. Let’s go deeper into this timely topic, plus other vital insights, in this week’s commentary.
Here is the heart of my commentary from Monday as markets were tumbling lower.
“Can the largest real estate company in China (Evergrande) bring down the world economy?
I highly doubt it. However, the ripple effects of this event are a curiosity to the markets which are making an appropriate risk adjustment just in case things get uglier. That is why the more a company is economically sensitive, Risk On, higher beta etc…the more shares are getting slashed today.
So what makes this so difficult for us as investors is that once this situation clears up…which I HIGHLY suspect it will fairly soon…then these very same mistreated stocks will bounce the most. That is why I just can’t sell a stock like MT today as it likely bounces 10%+ in the blink of an eye when the smoke clears from these events.
It really comes down to China’s handling of the situation. I suspect that a Centrally planned economy like there’s cannot afford to let this get out of hand. So given their history of burying problems with more and more debt then why wouldn’t they do that here as well?
That is why I am not in a panicked mood to sell today into this weakness. Because at any moment there could be an announcement from the Chinese government that shows great resolve on the matter and we quickly get back to Risk On investing.
If that does not unfold soon, then I will consider downshifting to 70-80% long to take some downside risk off the table.”
So far this has proven to be sound advice as the S&P got as low as 4,305.91 on Monday and yet Wednesday we closed nicely higher at 4,395.64.
Why have conditions improved?
First, because more investors see this event just as I had pointed out in my commentary above. Simply that the systemic risk is not that big, leading to a buy the dip reaction. This article on CNBC gives a solid explanation on the issue at hand:
Second, news emerged Wednesday that Evergrande was planning on making timely repayments of some key outstanding loans. So this also helped to ease nerves.
Overall the feeling is that it is in China’s best interest to contain this problem if it devolves further. Plus they have plenty of capacity in which to manage the situation. Put these 2 together and really just another chance to buy stocks for the next leg of the bull market.
Now let me switch gears to another topic. That being a few emails I got on Monday from some customers who do view things from more of a technical analysis standpoint.
In general they were saying that we should lighten our positions on dips under the 50 day moving average and then only buy back once the S&P breaks back above the 50 day once again.
This is a widely held notion amongst active traders to help avoid more dramatic declines IF stocks continue to head further south below these key resistance levels. On the surface there is great logic to this strategy. But in practicality it is not always the best choice.
For example, this year we have had 6 previous tests of the 50 day moving. Most of those events being VERY brief with your ability to perfectly time your way in and out being very low. In fact, I would bet you would have lost money the majority of these times enacting this strategy.
More importantly, let’s remember that I am not trading my own account here where I can go from idea to trade execution in about a minute. Instead I am managing a newsletter with many customers on board.
First, I need to have the plan fully formed. Next I need to write up complete details in a trade alert. Third, I need to send out the alert with enough time to feel confident that 90%+ of customers will be able to execute in timely fashion (preferably 100%).
When I spell it out like that you certainly realize that I am not driving a motorcycle where I can zip in and out of traffic. Instead I am at the wheel of a long tour bus that is not so nimble. And thus it leads to being a bit more patient in my approach to market timing events.
Indeed look at the hefty 1.2% bounce on Monday in the last forty minutes of trading. No way to get an update put together that quickly. Nor for enough customers to react before the market closes. These things all come into play in how to manage the trades for a large newsletter like the Reitmeister Total Return.
The last point on this front is the following. If there are a set of rules that you believe in…then you can enact them on your own.
That is why I say that RTR is a recipe made for the masses and each of you can season to your own taste. Meaning you can take steps to be more proactive on market swings as noted above. Or use a different set of stop limits on individual stock declines.
Perhaps you want to be a more aggressive investor than what I share for the service. This could lead you to taking a higher allocation in our riskier, higher beta selections.
Conversely the more conservative clients would do the oppositive. Meaning they can take larger allocations in the more conservative positions etc.
The point is that there are easy adjustments you can make in order to get RTR to fit your personal investing style.
The only other general market topic worthy of discussion today was the Fed announcement, which is pretty much what I expected. That being the notion that tapering of their $120 billion a month QE bond buying program will start soon. And that the idea of raising rates is more of a 2022 event and not 2023 as previously stated.
If this true, then WHY ON EARTH are bond rates so low…especially as inflation seems to surprisingly high?
This is indeed a great mystery for which I have not heard a rock solid explanation. Perhaps it is just as simple as saying that the Fed is in control of rates given the immense size of their bond buying activity.
CLEARLY that is true to date. But why, oh why, wouldn’t rates be moving higher when they tell you straight up, as they did today, that they will be unwinding that program?
Perhaps that is obvious too in the notion of…if they are in control of bond prices as the largest buyer…then talking about tapering means NOTHING until they actually start tapering. Thus, instead of the typical “bond vigilante” action to get rates better aligned with world realities like inflation…that can’t happen until the Fed becomes a smaller and smaller part of the bond market.
(A good extra credit research project is to read this article stating: The Bond Vigilantes Will Eventually Return).
Because of all the logic above, I still very much believe that bond rates will be higher in the future leading me to stay in my trade to short the bond market via the shares in the ETF (ticker reserved with Reitmeister Total Return members).
What To Do Next?
The Reitmeister Total Return portfolio has beaten the market by a wide margin this year. (+26.39% YTD).
Why such a strong outperformance?
First because I focus on the macro trends that tell us if we are in a bullish or bearish environment.
Second, determine the industries and groups set to outperform in the days and weeks ahead.
Third, I hand-pick the very best stocks from across the POWR Ratings universe.
In fact right now there are 12 Buy rated stocks and 2 ETFs in the portfolio ready to excel in the days and weeks ahead.
If you would like to see the current portfolio, then start a 30 day trial by clicking the link below.
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 $441.32 per share on Thursday morning, up $3.46 (+0.79%). Year-to-date, SPY has gained 19.19%, 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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