(Please enjoy this updated version of my weekly commentary published March 21st, 2022 from the POWR Growth newsletter).
First, let’s review the past week:
Over the last week, the S&P 500 is up by 6.9%. Last week’s commentary was about our ‘line in the sand’. Basically, we were going to stay aggressive above this level and a break and close below it would be our cue to revert to a more defensive stance.
So far, the market’s big bounce has validated this decision.
If we take a step back, it seems that the market has been range-bound between 4,100 and 4,600, since its initial drop in January.
Some will say this is simply a bounce as the market was ripe for a squeeze given high amounts of bearish sentiment and oversold readings into FOMC and an options expiration day.
Others are of the opinion that the market may have put in a sustainable low given the market’s strong thrust higher.
In my opinion, nothing has materialized over the past week that meaningfully changes the status quo. Yes, this bounce has been impressive and in a normal correction-type scenario, we reached sufficient bearish levels that would trigger a meaningful low and reversal.
But, given the magnitudes of bearish headwinds, I don’t believe this correction will resolve itself in such a convenient manner.
Instead, I think we are in store for a continuation of this choppy environment. Any hopes that the Russia-Ukraine issue is going to be resolved quickly have expired. This getting worse means inflation will get worse which will only force the Fed’s hand.
Therefore, I think it’s prudent to reduce exposure and take some profits as we get into the upper part of this range.
At some point, we will get a meaningful breakout or breakdown from this range, but I don’t think we are anywhere close to that point at the moment.
2 More Trends
Despite the market’s nearly 7% gain over the past week, little has changed. However, these times are great for studying stocks and sectors whose fundamentals are improving on an intermediate-term basis. When market conditions normalize, these are the first to make new highs.
Lately, housing and gold has caught my eye. Here is an excerpt from my POWR Stocks Under 10 newsletter discussing these two sectors…
Corrections are not as fun as bull markets for obvious reasons, but the one upside is that they give us opportunities to scoop up high-quality stocks at favorable valuations.
Think of all the bargains that were available in March 2020. The same type of opportunities will present themselves when this correction is finally over.
Therefore, I continue to pay attention to economic data and earnings reports to find the stocks and sectors that are seeing continued momentum and improving fundamentals.
We’ve talked often about travel stocks and energy and have taken decent positions in both. Today, I want to talk about 2 more – housing and gold.
Housing stocks have sold off as many believe the increase in mortgage rates could cool the market. Yes, some slowing is possible, but I believe the underlying supply/demand dynamics are strong enough to overcome this headwind.
Earnings reports from homebuilders have been very strong in terms of margins and demand. Even more, P/E multiples are in the single-digits implying that these stocks are pricing in a slowdown.
Well, I don’t see any slowdown which means that these will be fantastic buying opportunities.
The next area of interest is precious metals. Now, I’m normally not a fan and rather invest in productive assets rather than gold and silver. Further, as long as I can remember, I’ve heard from gold and silver bulls about hyperinflation, government default, the dollar dying, etc.
What bothers me isn’t gold and silver but simply that this group refuses to adjust their thinking based on the evidence that emerges. For example, many warned that QE in 2009 would lead to hyperinflation. It didn’t. And, gold fell nearly 50% between 2012 and 2015.
At the same time… I shouldn’t make the same mistake by not having an open mind and dismissing gold and silver without considering the evidence.
My antenna ears always perk up when something happens… that shouldn’t happen. This often is a precursor to a major trend. For example, gold topped in August 2020 despite so many bullish catalysts like the Fed’s easy money policy and the federal government running trillion dollar deficits.
Basically, gold was range-bound between August 2020 and February 2021, while nearly every other asset was soaring higher.
But, now gold is finding a bid even with the Fed embarking on its first-rate hike since 2018. Yes, this is in part, due to the elevated geopolitical risk with Russia’s invasion of Ukraine.
Still, there are some real similarities between the bull market in gold from 2002 to 2007 when prices nearly quadrupled and today. Then, we had 9/11 which had numerous ripple effects that were difficult to predict at that time, and the Fed was raising rates. Today is eerily similar.
I’m increasingly seeing this as an asset class to watch especially as it tends to do well in choppy or down trending markets when opportunities for outperformance in most parts of the market may be limited.
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SPY shares were trading at $448.64 per share on Tuesday afternoon, up $4.25 (+0.96%). Year-to-date, SPY has declined -5.54%, 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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