Written by Lance Roberts, Clarity Financial
This week I want to step back and talk about some misconceptions with concerning markets, cycles, and investing. However, before we get to that, let me give you a quick review and update on where we are following the “sellable rally,” we have discussed over the last couple of weeks.
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In review, we said last week:
“We remain primarily long-biased in our portfolios, but are also slightly overweight in cash, and portfolio weight in fixed income. We are also carrying some hedge by having overweighted “defensive” stocks a couple of months ago which have continued to provide outperformance.
There is a very good possibility this rally will continue next week as momentum and short-covering levels have been breached. However, if the market fails to set a new high and turns lower, the risk of a downside break will grow as we progress into summer.”
The rally did continue on Monday and hit our initial targets. We alerted our RIA PRO subscribers (FREE 30-day trial) to this on Monday. To wit:
- As stated last time:
- “The correction last week has set up a tradeable opportunity into June.”
- That tradeable rally is in process and we are approaching our initial target of $290
- Short-Term Positioning: Bullish
- Last Week: Hold full position with a target of $290.
- This Week: Sell 1/2 of position on any rally next week that hits our target.
- Stop-loss moved up to $280
- Long-Term Positioning: Neutral
That target was hit on Monday, and we sold 1/2 of our trading positions accordingly.
Since then, the market has languished around the 50-day moving average seemingly awaiting some catalyst to move it in one direction of the other. Fortunately, there are plenty of those on deck as next week the Fed will give us their latest musings on whether they are inclined to cut rates or not and Trump will be confronting China in the upcoming G-20 meeting.
Pass the popcorn, please.
As shown in the chart below, the short-term oversold condition has been reversed which limits upside, but the 50-day moving average has acted as support all week.
The concern this coming week will continue to be adverse news from the Fed, the White House, or the economic data which has continued to take a turn for the worse. Global economic growth has plunged as well as Q2 and Q3 economic growth estimates.
This also puts forward earnings at risk of recession, which will not play well with a market trading at rather extreme historical valuations.
“Oh my gosh, you are so bearish. You must just be all in cash and hiding in a bunker.”
Well, for those that are reading impaired, it must certainly sound that way.
However, in reality, we have consistently maintained long exposure to the markets, but continue to control our risks to protect against sudden losses of capital.
We will follow up with further commentary later today.
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