Is This a Bull Trap?
The stock market is in the midst of a brutal correction. Despite Monday's bounce, investors should remain cautious as there remains a considerable downside risk. Read on to find out...
The stock market is in the midst of a brutal correction. Despite Monday's bounce, investors should remain cautious as there remains a considerable downside risk. Read on to find out how the POWR Growth portfolio continues to outperform the S&P 500 (SPY).
(Please enjoy this updated version of my weekly commentary published May 2nd, 2022 from the POWR Growth newsletter).
The market never makes it easy. For bulls or bears.
Today, the bears were looking and feeling like geniuses as the market broke below the February 24 low of 4,100 on the S&P 500 which has served as a key support line for the market and us. But, these feelings of satisfaction probably turned into grimaces as the market staged an impressive turnaround to finish the day in the green with our portfolio finishing up 1.3%.
In today’s commentary, I want to discuss why I’m not getting my hopes up despite this pleasant turn of events and what is concerning me at this moment. Then I’ll discuss the steps to take if the market does break below 4,100 decisively, and then some thoughts on China and energy. Finally, we will cover recent movements and earnings reports from our portfolio.
As usual, we will start by reviewing the past week…
Here is an hourly, 3-week chart of the S&P 500:
Following last week’s 2.2% drop, we are down 3.3% this week for the S&P 500. And, at today’s low we would have been down 5.5%. An eery coincidence given that at last week’s low, we were down 4.4%.
We had slightly more pain in the Nasdaq and Russell 2000 which were down by 3.6% and 3.7%, respectively.
Not Getting My Hopes Up
Today’s bounce was clearly quite impressive, but I simply see it as more of the function of an oversold market with a very bearish sentiment. The nature of such markets is to have such bounces. And, these bounces could get even bigger, more violent, and explosive if we keep trending lower.
The market’s next catalyst is going to be the FOMC meeting in May 4 where expectations are for a 50 basis points hike with an outside chance of a 75 basis point hike. And, this is expected to kick off a series of 50 to 75 basis point hikes over the next few meetings.
It’s hard for me to see the market sustain a rally into such an event especially as the market is facing dual threats of inflation and a slowing economy.
What Concerns Me
As we’ve covered in previous commentaries, the bull case for the stock market was that the economy would grow fast enough to withstand the eroding effects of inflation.
I believe that the current weakness is due to investors seeing increasing odds of an economic downturn. And, this is primarily due to lockdowns continuing in China. But, we are also seeing many leading growth indicators start to roll over like ISM New Orders which often is an indication that the industrial sector is decelerating. Cyclical stocks are also pricing in a recession or a slowdown.
And, this scenario is the market’s worst fear. Slowing or negative growth means that earnings will decline, while higher rates mean that multiples contract.
As explained above, I’m having a tough time getting too enthused about today’s bounce. And a retest of the 4,100 level seems inevitable with the FOMC meeting coming up. Another thing that I’m seeing is that earnings are great, but stocks are popping and then finishing red which is consistent with investors seeing an earnings slowdown.
So, the next step for our portfolio is to get even more defensive if we break below 4,100 as this would be an indication that the intermediate trend is now down for the market.
The lockdowns and restrictions in China are a big deal. Mobility and activity measures in the country are at early 2020 levels in many parts of the country. Further, it’s already exacerbating supply chains and transportation bottlenecks which had just started to heal.
Basically, it’s not good when the second-largest economy in the world is knocked offline, and the normalization of the economy in terms of supply chains is likely pushed back another few months.
According to analysts, the CCP has pursued a zero-COVID policy over the last 2 years over vaccinations and boosters. In addition, the Chinese vaccines simply haven’t been effective. Therefore, a pivot is unlikely especially as local and regional political leaders are being evaluated based on case counts.
Based on the US, we know that the omicron outbreak ran out of steam after about 6 weeks. Due to vaccines and better treatments, deaths and hospitalizations didn’t materially rise like previous waves.
China is in a different place due to its system of government, policies, and lack of protection whether it's prior infections or vaccines.
I wanted to check in on energy. Currently, oil is at $105 where it’s been consolidating since its drop from $135. I’m finding oil’s resilience quite impressive especially given the decline in demand from China.
What happens when this comes back?
So, I’m watching with interest, and my expectation is that energy will once again outperform when we emerge from this correction.
What To Do Next?
The POWR Growth portfolio was launched in April last year and has significantly outperformed the S&P 500 since then.
What is the secret to success?
The portfolio gets most of its fresh picks from the Top 10 Growth Stocks strategy which has stellar +48.22% annual returns.
If you would like to see the current portfolio of growth stocks, and be alerted to our next timely trades, then consider starting a 30 day trial by clicking the link below.
All the Best,
Chief Growth Strategist
Editor of the POWR Growth Newsletter
SPY shares fell $1.30 (-0.31%) in premarket trading Tuesday. Year-to-date, SPY has declined -12.46%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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