Should Investors Be More Scared?

NYSE: SPY | SPDR S&P 500 News, Ratings, and Charts

SPY – Why is the S&P (SPY) rallying on such weak economic data? And what is the game plan coming into the 10/10 round of trade talks? The answers are shared below.

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Let’s play back the tape on what happened this week as I find it quite extraordinary:

  • Tuesday open finds stocks rallying strong and about to climb back above 3,000.
  • 10am Tuesday ISM Manufacturing hits a 10 year low at 47.8. Stocks crumble into finish line at 2940.
  • Wednesday the selling frenzy continues closing at 2887.
  • 10am Thursday ISM Services is a big downside miss with dramatic declines in new orders and employment components. Stocks continue sell off all the way down to 2855.
  • From that darkest hour Thursday morning a bounce unfolds closing the session at 2910.
  • Another +1.4% bounce is enjoyed on Friday ending the week at 2952.

That is quite a rollercoaster ride. But as we pullback to the big picture it does seem like the economy is weakening considerably.

So why is that a reason to rally?

And should investors be more concerned about the health of the bull market going forward?

We will cover both of those topics in today’s article.

What the Heck Just Happened?

The bullet points up top provide a play back of the events this week. But what is missing from the equation is the logic behind these wild moves.

Typically weaker economic results raises the concern about recession which quickly leads to a sell off. Yes, that did happen at first only to be wiped out by an end of the week rally.

I think there are 2 main reasons investors put those reports so quickly behind them. First, is that these results are considered negative by-products of the US-China trade dispute. And if a deal starts to emerge from next week’s round of negotiations, then it is quite reasonable to expect improved economic readings and stock prices ahead.

Second, is that this economic weakness increases the odds that the Fed will lower rates once again later this month. Sure rates are already quite low…but the lower the better according to the investor play book. So the market gleefully cheered the economic weakness in hopes of more Fed accommodation.

When Should Investors Start Getting Worried?

It all comes back to the outcome of China trade talks. Here is a quickie version of the 3 most likely scenarios:

Best Case: They emerge from next week’s negotiations with a deal in hand…or soon to be made. This increase in optimism leads to higher business spending and a commensurate measure of glee across the stock market.

Worst Case: Go back to late July when the trade deal last fell apart. The market dropped 7% in just a few short, painful sessions. Now add to that equation that we have MUCH worse economic data this time around. So a 10-15% sell off is quite possible if things turn sour on trade negotiations once again.

Middle Case: Imagine no deal. And no nastiness either. Just the sense it will take quite a bit longer for a deal to be finalized…like the end of the year or longer. In that case, concerns about the weakness in the economic data will grow louder. I would bet we make our way back down to the 200 day moving average at 2841 or lower until we saw if things improve to the Best Case or devolve into the Worst.

My Recommendation

As shared last week, I like to find a balance between the best and worst case scenarios. This way you are never caught off guard. And from that position it is easier to get more defensive or more aggressive depending on how things unfold.

My reading of the tea leaves has me just at 70% long the stock market at this time. I went in depth on this topic in my recent free webinar. Not just my market outlook, but also specific portfolio recommendations including income stocks and inverse ETFS to be a touch more defensive during this unique time for the market.

Watch free webinar here.

But also other recent commentary will have you headed in the right direction including:

The Stock of the Week…is NOT a Stock

Top 5 Stocks from the #1 Ranked Industry

7 Extreme Yield, Extreme Value Stocks

Wishing you a world of investment success!

Steve Reitmeister

…but my friends call me Reity (pronounced “Righty”)
CEO, Stock News Network

Editor, Reitmeister Total Return

SPY shares fell $0.03 (-0.01%) in after-hours trading Friday. Year-to-date, SPY has gained 19.44%, versus a 19.44% 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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