I used the uptrend this week to close out additional positions. My remaining holdings are concentrated in Small & Mid Cap Indexes, Energy, Aerospace Defense, and a few ReOpening stragglers.
I held the COVID90 portfolio too long. One of the reasons was the Ukraine Invasion. Counterintuitively, the Invasion was a perfect setup for the ReOpening trade. It provided the catalyst for COVID amnesia…suddenly the Establishment didn’t care about social distancing, masks or vaccine boosters. Companies favored by the reopening flourished in both revenue and profit; unfortunately for my portfolio, stock prices were dragged down by the new fear agenda of inflation & rising interest rates.
In spite of the negative headline, the economy has been resilient and through August there was a strong possibility for a stock market rally into yearend. But the lower double dip that occurred at the end of September put the Market just above the Danger Zone. Not “in” the Danger Zone but close enough for concern. This is the time for building cash reserves.
The below chart illustrates the last two times the Market breached its Long Term Moving Average (LTMA) for a sustained period of time- DomCom Bubble & 2008 Financial Crisis. Will that occur this time? Maybe, maybe not.
New Uptrend– the bottom could be in if there were a significant positive catalyst like an easing Fed or resolution in Ukraine. Consumer demand has remained strong, corporate profits are solid, and LOTs of investor money is sitting on the sidelines. Pessimists will miss the opportunity.
Sideways Market– the Market could remain range bound, with the S&P 500 trading somewhere near its LTMA low and maybe as high as 4000. Swing trading the volatility can be very profitable in a range bound market.
Catastrophe– a severe breach below the LTMA would result in another notable stock market crash. For this to occur, there will likely be an event that triggers the cascade. In 2008 it was the bankruptcy of Lehman Brothers; after the initial drop of the DotCom selloff it was the 9/11 Terrorist Attacks that propelled the Market lower for longer. Crashes are not enjoyable, but they always set the stage for the next big bull market cycle. Be patient and have a HIGH level of cash on hand to buy the dip.
The next couple weeks will be busy. The Fed announces its next rate hike on Nov 2 and the Midterm elections are the following week, Nov 8. Expect more volatility (positive or negative) around these events.
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