Investors were drawn like a moth to a flame to the edge of bear market territory. And just as they were about to cross bear market territory below 3,855, a rally ensued late Thursday. That was extended further on Friday, rising as high as 4,023.89. Is this just a bear market rally or really the end of this dramatic 4 month correction? This discussion will be the focus of today’s POWR Value commentary. Read below for more….
(Please enjoy this updated version of my weekly commentary from the POWR Value Newsletter).
Let’s turn the clock back a week to our previous comment of 6/5: 2 different ways for the stock market from here.
This was a lengthy article talking about what it would mean to break below 3855 into bear market territory as opposed to bouncing at that level when bull market resumes.
Unsurprisingly, shares were so close at 3,858 before support kicked in, leading to a +4.3% rally by Friday’s close.
Unfortunately, this support is NOT proof that the bear market threat is over. On the other hand, it could very well be the obituary of the nasty correction of 2022.
This brings us to a new fork in the road with 2 possible paths. Let’s review the possibilities, which are almost equally likely in my book:
Bulls on parade: FOMO rally
Imagine a 2-3 week rally with stocks climbing higher every day. Bears will hold out at first. But little by little, they will start giving in to their FOMO fears.
Also, all that dry powder cash is starting to come off the sidelines.
It would not be uncommon for stocks to surge 10-15% over this period and surpass all major moving averages again, leaving no doubt that the bull market is back in charge.
Before you get too excited, we need to look at the other equally plausible scenario that will dampen your enthusiasm…
Consolidate here and delay the Bull/Bear conclusion
Remember that relief rallies are usually +3-5% before testing lower again. And that’s pretty much the size of the jump we got from Thursday afternoon through late Friday.
So it’s not hard to imagine us spending time in a range trading between the border of bear market territory at 3,855 and 4,100.
This means that bulls and bears will battle each other a little longer before making the final decision on whether we will plunge into the bear market or the bull will reappear.
We would all prefer the former choice. And can even make logical presentations showing why this is the more likely outcome.
Unfortunately, we have to acknowledge that the combination of high inflation and a hawkish Fed is not the most equity-friendly environment.
No guarantee of a bear market…but fertile ground that could support growth in bearish conditions.
Add it all up and we’re not far off divergent paths discussed last week. And that keeps us in wait mode.
If the bull market continues from here, we still have some extremely attractive stocks that have shone over the past two days and would continue to thrive in this environment.
Any stock that doesn’t quickly shed its former red arrows will be replaced by stocks with greener horizons.
As we transition into a bearish market, we know how to become more defensive, as outlined last week.
We appreciate that investors generally understand that patience is a virtue. And you must draw on that reservoir of patience to make it through this next leg of the market.
Keep Calm and carry on!
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All the best!
CEO StockNews.com & Publisher of POWR value trading service
SPY shares closed at $401.72 on Friday, up $9.38 (+2.39%). Year-to-date, SPY is down -15.16% versus a percentage gain for the benchmark S&P 500 over the same period.
About the Author: Steve Reitmeister
Steve is better known to StockNews audiences as “Reity.” In addition to being the company’s CEO, he shares his 40 years of investment experience with the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his latest articles and stock picks.