Lack of bad news = good news = new record highs

We got that equation right leading us to move to 80% long the market with more Risk On positions. In fact, 11 of our 12 positions are now in positive territory.

But before we dislocate our shoulders slapping ourselves on the back…let’s make sure we understand the market environment that lies ahead and what that means for our trading strategy.

Market Commentary

Our outlook for stocks has been on course. That is where the lack of bad news on China trade allowed stocks to move higher and higher.

Not really a runaway bull market. More of what I call a “melt up market”. That occurs when there is no clear reason to go down…and no fresh catalyst to blast higher = net result of dripping higher little by little each day.

And this melt up probably has room up to a peak of 3,100 without more concrete proof of progress on trade. If we get that served up then 3,150 to 3,200 is a real possibility before the year is out.

Unfortunately we want to keep our eyes affixed to the very real possibility that this deal bogs down and stocks tumble once again. Granted the odds of making a deal are higher than no deal. But the downside potential of -10% for stock prices is a bit more eye opening than the 3-5% upside potential with the deal coming through. This higher amount of risk than reward has us keeping us at only 80% long with an ample serving of more conservative positions on the books.

There is a lot of interesting little tid-bits from this week. Let’s knock them out in roll call fashion:

China trade seems to be on track with some positive sound bites from the President saying that they are ahead of schedule and will be locking down key portions of the agreement soon. To be honest I am not a big fan of the word “portions” as it means not all. And thus how many phases will it take to get the totality of this deal finalized? Most pressing of which…when do both sides roll back existing tariffs? The answer to that is when this dark cloud will finally be removed from the market outlook.

The APEC summit in Chile where Trump and Xi were set to meet and sign the Phase 1 deal has been canceled. This had nothing to do with the trade negotiations. This was more a concern internal to Chile about protests they are having in their own country and thus not a good time to host the event. So this was not really a market moving event. Just important that they find another date soon to get Phase 1 finalized.

The Fed did agree to cut rates a 3^rd time today with another 1/4% move. I find it laughable that the market futures pointed to expectations for a 1/2% reduction. There was just no rationale call for that with GDP expanding (more on that below) + no inflation + China trade getting on track. In fact, the Fed made some comments that there are no more rate cuts coming any time soon. And they won’t be raising either unless there is a serious increase in inflation. This takes the Fed off the table for a while putting us back to a focus on China trade and economic data.

Q3 GDP first read rolled in today at +1.9% vs. 1.7% consensus. Basically it is in most ways a facsimile of Q2 GDP led to by strong consumer and government spending and weak results for business investment. However, that business weakness was not as bad as last time. So if the economy is doing this well with the drag of China trade concerns…then imagine how well it would do if that albatross around our neck was removed?

PMI Composite Flash last Thursday was a nice upside surprise vs. expectations of 50.9. Best of all was the leap for Manufacturing to 51.5. Also helping the cause is an improvement in New Orders which bodes well for future readings. When you combine this with the recent improvements in the regional manufacturing reports, it foretells that the November 1^st ISM Manufacturing should rise from recent levels and start to ease growing concerns about the current health of the economy.

So when you boil it down we find that economic data is better than expected. And the Fed continues to be accommodative. And bond rates are super low making stocks the much better value.

With that all being true, then we probably continue to melt up unless something negative happens on the China trade front. Unfortunately that is still a very real possibility. So for now, no news is good news in this arena. Let’s just not fall asleep at the wheel when this southern detour for stock prices is still plausible.

Portfolio Update

Last week I gave the honest assessment that we have seen a modest underperformance the previous two weeks. Nothing serious. Just that during the sector rotation phase that we saw a few more losers than winners. My solution was to stay the course with our fundamentally sound stocks expecting more of the future coin flips to come up in our favor.

And did it ever!!!

We have truly crushed the market this past week starting last Thursday thanks the impressive beat by PayPal. Gladly many other stocks came along for the ride and the portfolio rallied +0.92% vs. only +0.19% for the S&P. Then on Friday we tallied another 1% gain which was 2.5X better than the S&P.

The point is that any mild underperformance the previous two weeks of sector rotation was quickly rectified of late…and then some.

Lots of other details to share with you today on the rest of our positions. So read on below:

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The rest of the commentary is reserved for subscribers to the Reitmeister Total Return portfolio. That is where I discuss specifics on our portfolio where 11 of 12 positions are in positive territory. In fact, one of the stocks actually beat earnings Wednesday after the close and rallied 11% on Thursday.

To see the full portfolio (which was in positive territory Thursday as the overall market tumbled), the next trades, and read the rest of this commentary, just start a 30 day trial. Click the link below to learn more.

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SPY shares rose $0.02 (+0.01%) in after-hours trading Thursday. Year-to-date, SPY has gained 23.06%, versus a 23.06% 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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