Is the Market Rally for Real This Time?

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Another impressive rally this week, after flirting with bear markets territory. Everyone is asking the question: Is it safe? Is it safe to say that we are done with this correction? Or is this another temporary rally that leads to the next leg lower. These important topics will be the focus of our POWR Value commentary today. Continue reading for …. more.



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(Please enjoy this updated version of my weekly commentary published May 27th, 2022 from the POWR Value newsletter). I believe there are three keys to discuss the bull/bear topic: Fundamental, Price Action, and Sentiment.

Let’s start with the fundamental view.

Taking it from the top GDP Now is done with all the May data ending up with a 1.9% estimate for Q2 GDP. Yes, it is better than the actual reading of -1.5% for Q1 GDP. It is still lower than the 2.5% reading a week ago.

On top of that I read an article pointing out that 13 of 19 key monthly economic indicators came in lower than expected in May. Yes, they still point to the positive GDP readings, but coming in below expectations is a directional concept that we should appreciate as it could lead to more disappointment in future reports. The most notable report I would mention was Tuesday’s PMI Composite Flash Report. This is a broad indicator that covers many aspects of the economy. That fell from 56.0 previously to 53.8 for May. This is also the 2nd worst reading in a calendar year, and 3 consecutive months of heading lower.

Putting it all together, we see that the economy continues to grow…but many indicators are showing lower and less positive results. This is consistent with the narrative that high inflation can be harmful to the economy over the long-term. In fact, we may still be seeing its negative effects at large, which I would consider neutral for the fundamental picture. However, it is becoming more bearish.

Price Action

I am not going to waste your time with a chart because I am already saying something you know to be 100% true. This means that there have been many bounces since the correction began. Many were followed by more negative action.

It is difficult to see why this rally is better than others. We are closer to the moving averages. Breaking above 50 day at 4,276 would be a nice start. But really hard to get enthusiastic til we see a clear break above the 200 day at 4,456.

Could it happen? Yes…but right now this just feels like another short lived rally before the pain train comes back to town.

Sentiment

Often we think of sentiment and price action as being one and the same. Here are some thoughts on Wall Street.

Venture capital investors are among the smartest people in town. And they are running for the hills as proven by articles like these:

Boom Times Are Over

Sequoia Coaches Start Ups to Cut Cost or Face Death Spiral

Venture Capital Firms Have Very Bad News for Startups

The point is to think of bearish sentiment as a virus that spreads over time. The more people who are infected with the idea, it becomes reality every wave.

Right now, there are enough people – including some of the most intelligent investors – who have the virus and are spreading the bearish idea which increases the chances that we will tip into bear market territory.

It doesn’t guarantee this outcome. Because a long ride on the wall of fear could counteract these ideas, and kill the bear.

Particularly if rates continue their current moderate pace…and especially if dollar weakens which is better for US exporters.

Add it all and the chances of a bear market have increased. In fact, I have recently tipped over the 50% likelihood mark on that being true leading to defensive measures in both POWR Value and Reitmeister Total Return portfolios.

I want to be wrong. I welcome the return of the bull. Given the current facts, I will maintain this conservative stance for a while longer.

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All the Best!

Steve Reitmeister
CEO StockNews.com & Editor of POWR Value trading service


SPY shares closed at $415. 26 on Friday, up $9. 95 ( 2.45%). Year-to-date, SPY has declined -12. 30%, 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.

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