Confused by what’s going on in the stock market? You wouldn’t be the only one. Despite all this bad news, the S&P 500 ( SPY ) is currently up about 7.5% for the year. So what exactly is going on here? Read my latest market commentary below to find out….
(Please enjoy this updated version of my weekly commentary originally published on April 20mIn 2023 POWR Stocks Under $10 Newsletter).
Yes, the stock market has really been a bit confusing lately, hasn’t it?
Despite all the bad news — mini-banking crises, rising geopolitical tensions, recession predictions — the stock market is doing surprisingly well in 2023.
(Please note that I said “share market” is doing well… not “stocks”. There is a reason. More later…)
Market elasticity is an example of a concept known as the “pain trade,” a phrase I’ve heard before but never really looked at so thoroughly until now.
The best way I could describe it was this: “The goal of the market is to extract the most pain from the greatest number of people.”
Essentially, when everyone is bearish, the pain trade is for stocks to go up. When everyone is bullish, pain trades stocks to go down.
And as we’ve discussed in this letter for months, everyone had a good reason for the recession.
A month ago, everyone was freaking out after the failure of Silicon Valley Bank and other regional lenders, and the CNN Fear and Greed Index was deep in the “fear” category.
It makes sense that everyone was waiting on the sidelines. (Remember, most people were ultra bearish at the end of 2022, when we saw people fleeing the market.
Since they’ve already sold, they can’t sell again… that’s why we don’t see another big selloff with March’s negative sentiment.)
But now that the sentiment is improving, more and more people are starting to feel optimistic about the market.
Or at least that they’re missing out on all the benefits and are willing to risk dipping their toes in the water, recession be damned.
These hesitant “bulls” buy the market at a moment where we see the potential weakness we’ve all been talking about showing up on the charts.
That brings me back to my earlier point that the “stock market” is doing well, and “stocks” are not. You see, “stocks” aren’t really doing that great.
A number of analysts are concerned that this rally is much more vulnerable than it appears.
Part of that is because market breadth has been weak. As of last Friday, less than half (45%) of the Russell 3000 stocks were trading above their 200-day moving average.
That coincides with news that the rally has been largely driven by a handful of mega-cap stocks like Microsoft and Apple.
We’re also seeing low volatility — the VIX is at its lowest since the start of the year — which could mean investors are likely too complacent and stocks could be headed for a selloff.
To regress volatility to the mean, we need the S&P 500 (the spy).
That’s consistent with many of the analyst notes we’re seeing warning investors that even a mild slowdown will result in a significant market selloff. Many believe we will retest the October 2022 low – or a drop of more than 15% from current prices.
Those experts are recommending that clients remain underweight on stocks and overweight on cash, which is where we are right now.
Personally, I’m still more bearish than bullish, which I know is the popular choice. But I’m still a believer that we can make money by owning certain high-quality stocks.
Looking ahead, the next three weeks of corporate earnings reports for Q1 2023 and forward guidance for the rest of the year will hopefully help bridge the gap between markets’ resilience and investor patience.
conclusion
Despite my bearish leanings, I’m always on the lookout for new portfolio additions that fit our portfolio mandate.
We’ll see what we can scare up over the next few weeks as companies continue to report earnings. Keep an eye on your inbox…
What to do next?
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All the best!
Meredith Margrave
Chief Growth Strategist, Stock News
Editor, POWR Stocks Under $10 Newsletter
SPY shares closed up $0.32 (+0.08%) at $412.20 on Friday. Year-to-date, SPY is up 8.20%, the % gain of the benchmark S&P 500 index over the same period.
About the Author: Meredith Margrave
Meredith Margrave is a well-known financial expert and market commentator for the past two decades. He is currently the editor of POWR growth And POWR Stocks Under $10 Newsletters Learn more about Meredith’s background with links to her most recent articles.
Post Bears have a front-row seat to the “pain trade.” appeared first StockNews.com
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