Rising Treasury yields and a soaring dollar hamstringing multinational companies have weighed on stocks lately.
The summertime swoon may have surprised many investors, given the S&P 500's rapid runup during the first half, but not everyone was convinced it would be a straight line higher the rest of the year.
In August, Real Money technical analyst Bruce Kamich warned investors that a reckoning could happen, sending shares lower.
Kamich, who has analyzed stocks professionally for 50 years, said at the time that investors should expect another leg down in stocks because yields would trend higher and sectors, including technology, were topping.
Sure enough, Kamich's bearishness proved prescient. The S&P 500 has been down since July, and many stocks have retreated more than the broad market has because yields and the dollar have surged.
What does Kamich think now? He recently explained why he's a big fan of a particular investment, calling it his "top buy idea for the end of 2023."
A market on the precipice?
This year, the stock market's rally has defied expectations that stocks would lose ground because of the risk that the Federal Reserve's interest rate increases, designed to slow inflation, would put the U.S. economy into a tailspin.
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While economic activity has so far held firm, with GDP growth in Q1 and Q2 and only a slight weakening in the job market, we're far from out of the woods.
In August, inflation reared its ugly head again, suggesting household and corporate budgets remain squeezed. Headline CPI increased for a second month, to 3.7%, tied to rising energy costs and to a restart of student-loan payments in October. (Those payments had been paused because of covid, and the restart is likely to worsen many people's financial situation.)
The significant rise in 10-year-Treasury yields over the past two months suggests that investors are increasingly skeptical that the Fed's battle with inflation is won or that the U.S. can orchestrate a soft-landing, a retreat that sidesteps recession while also quelling inflation.
A top idea to buy now
Kamich said stocks would come under pressure in August because Treasury yields would rise. If yields don't give back some recent gains, it could be bad news for stocks because higher yields reduce the value of future earnings in money managers' stock valuation models.
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Kamich hasn't changed his tune. He still says the likely path for stocks is lower. As a result, his top pick for the rest of the year is Direxion's Daily S&P 500 Bear 1X Shares ETF (SPDN) -), an ETF designed to perform inversely to the stock market's favorite benchmark.
His interest in the bearish ETF stems from technical analysis. After considering the price and volume action for the ETF, he concludes that it could be poised for outsized gains.
"My top-down view of stock prices is bearish, and I look for a significant move lower into 2024," wrote Kamich. "Since early August, I have been writing about more 'avoids' than 'buys.' This reflects my bearish top-down view of the marketplace."
Kamich says the on-balance-volume -- essentially a running total of up minus down volume -- has increased since early August, suggesting more aggressive buying of the ETF. He also thinks SPDN's share price could be making a large double-bottom pattern, similar to in late 2021.
If the stock market retreats, Kamich says, this ETF "should stage a significant advance."
Sign up for Real Money Pro to see what other stocks Kamich thinks could be winners.
