Usually, Thursdays are a great day for commentaries, because Fridays tend to be low-volatility and volume days. Occasionally, this isn’t the case like today for instance. Tomorrow, there is the inflation report and Chair Powell’s speech at Jackson Hole. Both of these are going to be major factors in determining the stock market’s (SPY) near-term direction. Therefore, this is a good day to focus on more big-picture items although we will give some updates on the new bull market vs bear market debate that continues to rage on Wall Street. Read on below to find out more….
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(Please enjoy this updated version of my weekly commentary published August 25th, 2022 from the POWR Stocks Under $10 newsletter).
Over the last week, the S&P 500 (SPY) is down by a little more than 2%, although the losses were closer to 4% at Tuesday’s lows.
Like we have for previous commentaries, this continues to be an on or off market, meaning there is little insight to be gleaned from looking at performance of different parts of the market.
As discussed in the intro, this ongoing bounce and tomorrow’s events are going to play a large role in determining the bull/bear debate. This debate has been dominating Wall Street since the market rally that started in mid-June.
A month ago, I was certain that this would prove to be another bear market rally. Now, I’m less certain and more open to the idea that this could be the start of a new bull market.
For a while, the discussion was more academic until we hit the 200-day moving average last week. All of a sudden, things got more real as the market pulled back more than 5% from last Monday’s high to Tuesday’s low.
Now, we are moving higher out of a short-term, oversold state, but this move could be terminated with a bad inflation print or some hawkish comments from Chair Powell.
Currently, the market seems to expect some sort of pivot from the Fed or even acknowledgement of slowing growth and inflation. And, it’s also looking for a continuing softening in inflation data.
As we’ve covered previously, I don’t think a “Fed pivot’ is necessary for the stock market (SPY) to rally but for inflation to start materially declining as one is the prelude to another.
Rather than speculate on matters that will be known in a few hours, let’s shift our focus to some bigger-picture ideas.
Market Roundup
13F Filings
Every quarter, we get to see what top investors are doing.
Michael Burry of the Big Short is very bearish and has sold all his stocks except for 1 – GEO, a private prison operator. (A theme we have discussed often).
Buffett seems to be buying the dip as he continues to put money to work. Stan Druckenmiller is getting more bearish as he sold off big positions in Amazon, Google, and Facebook.
George Soros, on the other hand, is feeling bullish and is buying the dip in stocks like Amazon and Tesla.
Bid After Bad Earnings
One qualitative piece of evidence supporting the bull market argument is that so many companies are reporting bad earnings but then their stocks are being bought regardless.
This is one indication that “weak hands have sold’ and strong hands are buying, while bad news may already be reflected in the stock price.
Some examples of this are Nvidia, Target, Coinbase, Walmart, etc.
Seeing this happen over and over again is one reason that I’ve moved out of the bear camp and into the neutral one. And, it’s the opposite of what we experienced in Q4 of 2021 and Q1 of 2022 when companies would crush earnings but see their stocks selloff.
Inflation Peak vs Recession Narrative
Another irony is that falling inflation is bullish, while increasing recession odds is obviously bearish. But, both are happening in part due to the Fed tightening policy.
If we take a look at it from a global growth perspective, there is a massive deflationary impulse rippling through the economy due to China’s economy running at below capacity which is negatively impacting commodity prices.
Currently, it’s dealing with an energy and water crisis which is forcing the country to ration power and limit industrial activity.
In most economic environments, this would be a major problem. In this one where inflation is a major risk factor, it’s actually been kind of helpful in terms of reducing inflationary pressures.
Growth Stocks
Growth stocks have been kind of a leading proxy for the market. Many of the frothiest, peaked in the spring of 2021, while others topped later in the year. This was well before the broader market which topped in January of this year.
Interestingly, the inverse took place recently as many growth stocks bottomed in mid-May and made a higher low in mid-June, even though the indices and most stocks made lower lows in June.
Currently, growth stocks have been the strongest performers during this rally. One reason is that moderating inflation is leading to lower rates which put a bid underneath growth stocks.
The other is that these stocks were heavily shorted which means that shorts are being squeezed.
It’s also worth noting that ‘junk’ growth stocks with no earnings and high valuations are leading the rally, while more higher-quality growth stocks are lagging. This could be interpreted as a lack of institutional participation in the rally.
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All the Best!
Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter
SPY shares . Year-to-date, SPY has declined -11.02%, 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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