bullish vs. Bearish stock…

“Are you really bullish now?”. That was the question I got late last week from StockNews CEO Steve Reitmeister after I posted my comments for my POWR Stocks Under $10 newsletter. Even though he and I differ from time to time on our respective stock market (SPY) outlook, I think my answer still surprised him. Let me tell you how it all went.

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(Enjoy this updated version of my weekly commentary published January 17^e2023 of the POWR Growth newsletter).

For those of you who missed my Stocks Under $10 release, I’ve highlighted some of the bullish “green shoots” I saw in Thursday’s CPI report. Here’s the summary. (And for those of you who have already read this, apologies for repeating myself.)

Here are the two most interesting data points I’ve seen:

1) House prices rose only 0.8% compared to last month. Lodging accounts for about a third of the CPI. Gains in this line have leveled off and are no longer leading to large jumps in inflation.

2) Used car prices fell 2.5% last month and 8.8% last year. While used car prices make up a much smaller portion of the CPI – just 3.6% – Fed officials blamed inflation for the spike in used car prices as it started to rise in 2020. I’ll bet Fed economists are still watching the data and happy with this drop.

This month’s report also marked the third consecutive downward trend in consumer inflation.

I’m not going to come out and declare that we’ve won the war – if you’ve read these numbers over the past few months you know I think there’s still more room for cons than pros – but I’ll go on record saying that things are moving in the right direction.

The fact that we now have three consecutive months of reports all pointing in the same direction is very positive.

Plus, the fact that the job market has somehow remained healthy gives me a glimmer of hope that the elusive “soft landing” will actually happen.

I found the details encouraging. And based on the rally that followed, it seemed that other traders agreed.

So, back to the big question from Reity. Am I bullish now?

The answer is… it’s complicated.

I’ve been pretty bearish for the past six or seven months. Fed Chair Jerome Powell made it pretty clear that inflation was enemy #1 and that the central bank would do anything to get prices under control. I mean come on; his main buzzword was “pain.” It wasn’t a good time to be anything for long.

And as we saw in 2022, Powell meant what he said and he said what he meant. Equities paid the price, falling nearly 20%. We ended the year feeling sorry for our “no show” Santa meeting and sighing over the number of analyst forecasts for poor earnings and a coming recession.

And then we flipped our calendar year and started looking things up. Stocks are up nearly 4% in just a few weeks. And the price can’t lie. Clearly someone is buying.

So, what’s the deal? Did someone forget to send the memo that we went from bear to bull?

It certainly looks better than we collectively expected at the end of December.

So, am I actually bullish now? Not special. But I’m not particularly bearish either.

If you ask me, I think we’re somewhere in between. Things aren’t roses and teddy bears… but they’re not about to collapse either.

Yes, we still have inflation and a Fed threatening to raise rates further… but we also have three consecutive months of reports showing that inflation is on a downward trend.

We have an inverted yield curve… but we also have an economist Campbell Harvey says the famous (and highly accurate) recession indicator could be wrong this time. That is very bad; Harvey is the man who linked inverted yield curves to recessions in the first place.

We have huge missed revenues, like today’s Goldman Sachs report… and then big gains, like today’s United Airlines report.

Things are complicated, y’all!

But I see three potential turning points that could somehow make things a lot less complicated.

1) Things (economic data/revenues/current events) turn negative.

One reason I think people might buy now? We’ve set the bar very, very low. Going into the year, we expected disaster. But so far things have been pretty neutral, which means they’ve been great!

But if this is just a bear market rally, I think the first sign of negativity could spoil the party and scare off investors. And then we’re back to everything, just being the worst.

But what if we get bad news and investors just shrug it off? Or if we continue to see more of these economic ‘green shoots’ in subsequent reports? Then yes, I think we could be looking at a new bull.

2) The labor market is finally improving.

The ‘consumer’ will continue to consume as long as the job picture remains rosy. That is certainly another factor driving stock prices right now. Many people argue that we “can’t” have a recession because the labor market is too strong.

This is, of course, a poor “bull market” indicator to rely on, as employment lags most other indicators.

Of course, if employment remains tight, people will continue to spend and the Fed will likely get the “soft landing” they’ve been looking for. But we could be well on our way to the next leg lower before we see any weakness in job numbers, as employment is a lagging indicator.

That’s why it’s hard to hang your hat on the job posting data.

(Oh, and we’ve seen some weakness in job numbers. Just ask anyone you know who works — worked? — in the tech industry, where a number of major companies have laid off several thousand workers.)

3) The S&P 500 breaks above 4,000…and stays there.

This is currently an important psychological resistance level in the market. Over the past week, the S&P 500 (SPY) managed to get THIS CLOSE to closing above 4,000… only to run out of pennies.

Why is that number important? It theoretically doesn’t. What does matter is that we haven’t gotten over it now – several times. So now, as stocks begin to approach 4,000, buyers wonder if they’re buying too high… and then all buying interest dries up.

If investors had a strong belief that the S&P 500 would continue to climb above 4,000, they would definitely buy. The fact that we can’t break that level means there isn’t enough bullish conviction. In order for the market to pick up again, we have to break through that barrier.

Until we do…or until we see the results of one of these two other potential turning points, things are likely to remain complicated.

Conclusion

To look. The bottom line is that we are in the purgatory of the market. The potential of a recession hangs over our heads… and over the market. I’ve even heard an analyst say it would be better to have a recession and just get it over with.

Even in the best-case scenario – no recession, mixed earnings, a pause in rate hikes – I don’t see anything pointing to a market boom. Prices are still increased. Supply chain issues are still very real. Companies are still warning investors not to expect much growth this year. It’s probably not going to be a 30% gain year.

However, as we’ve seen in our portfolio, we can still have picks that are up 16% in a month… or 92% in the middle of a bear market!

Until we see the market swing one way or the other, we’ll probably keep about half of our capital in cash and the other half in quality growth stocks. That’s how we stand strong no matter which way the wind blows.

What to do now?

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Best!

Meredith Margrave
Chief Growth Strategist, StockNews
Editor, POWR Growth Newsletter

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SPY Stocks. Year-to-date, SPY has gained 2.37% versus a percentage increase of the benchmark S&P 500 index over the same period.

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About the author: Meredith Margrave

Meredith Margrave has been a well-known financial expert and market commentator for the past two decades. She is currently the editor of the POWR growth and POWR shares under $10 newsletters. Learn more about Meredith’s background, along with links to her most recent articles.

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