The S&P 500 ( SPY ) is starting to test key support levels for the first time since November 2023, given continued signs that Fed rate cuts are being pushed further into the future. This begs the question of “how low can stocks go?” 44-year investment veteran Steve Reitmeister does his best to answer that question, including a trading plan and top picks to stay one step ahead of the market. Read below for the full story.
Anyone who knows me personally would question my choice of professions. This is because I value rationality and justice very much. And yet the stock market that is at the epicenter of my daily activities is very irrational and unfair.
Over the past 44 years I have been waiting for the unexpected which makes it easier to deal with periods of instability and craziness.
That sets us up for an interesting discussion today to talk about what the reasonable path for the stock market is from here. And then what is possible (which can deviate a lot from the reasonable path). And yes, along with that I'll share a trading plan to stay on the right side of the action.
Market Commentary
Plain and simple, stock prices ran ahead of fundamentals. High inflation has not yet fully subsided and so the economic catalyst of lower rates is pushed further and further into the future.
Now the debate is whether the first cut will come in July or September (and maybe even later). Given that rates would still be quite high and restrictive for the economy at that level, then the economic payoff of all this is looking more like a 2025 issue.
This means that share prices are priced a bit too rich here in 2024 leading to a suitable profit round. It means that the reasonable response is for stocks to retrace some of the last steps that lead us to the S&P 500 (SPY) chart below.
Moving average: 50 days (yellow), 100 days (orange), 200 days (red)
We just broke below the 50-day moving average for the first time since early November. That puts the 100-day moving average at 4,921.
However, this level is increasing quite a bit. It would soon join the important psychological point of 5000 to provide enough support for the market.
Meaning the reasonable and rational move for this market is to retrace about 5% from the recent highs of 5,265 to find a low around 5,000.
Unfortunately, as shown in the introduction…the market is often not rational at all. This means that we should consider the possibility of a test of the 200-day moving average.
I see almost no chance of us getting it to its current location of 4,666. However, given that its current slope takes it to around 4,800 by the end of May. Then this test is an opportunity on the way. Especially with any more bad news on the inflation front further delaying the first rate cut.
Also, on the spectrum of the market not being reasonable, this bearish spell could end soon with a move back to recent highs. This can happen because investors work on the premise of what's ahead…not what's happening now.
So, knowing that rates will come down at some point, then investors can keep revving their engines at this red light, knowing that it will soon turn green.
It means that after this modest and long overdue pullback, some excess will have been removed allowing investors to play patiently in a trading range between 5,000 and 5,265, waiting for the rate cut signal to be printed higher.
Trading Plan
This is still a very large market. Just one that was a little too much and ripe for the pull that's going on right now.
I see downside risk for the S&P 500 as about 250 points (5%) to 4,800 versus my upside target of 5,500 by years end (10% upside). The reward being better than the risk keeps me fully invested at this time. Just a slightly more conservative mix of stocks to weather any future storms (and yes, these moves have already been quite useful in April in the midst of this pullback).
Investors should continue to have an eye more on value than growth. The 18% loss this year for the baby boomer, ARK Innovation Fund (ARKK), is a perfect example of what I'm talking about avoiding right now.
Gladly, the 31 value factors calculated in our exclusive POWR Ratings system will help you make sure you have a value bias right now.
Additionally, investors will be very focused on the quality of the earnings reports that will begin rolling in in earnest over the next few weeks.
Companies that can will be rewarded.
Losing companies will be crushed.
Happily, the additional 13 Growth factors and 31 underlying Quality factors also in POWR Ratings are a proven statistical advantage to find companies most likely to beat earnings and enjoy the best share price performance.
In short, now is a vital time to focus on the best POWR Ratings stocks. To see my favorite picks, read below…
What should be done next?
Discover my current portfolio of 12 stocks filled to the brim with the best returns found in our exclusive POWR Ratings model. (Almost 4 times better than the S&P 500 since 1999)
This includes 5 recently added under-the-radar small caps with tremendous upside potential.
Plus I have 1 special ETF that is incredibly well positioned to outperform the market in the coming weeks and months.
All of this is based on my 44 years of investing experience seeing bull markets… bear markets… and everything in between.
If you are curious to learn more and want to see these 13 hand-picked lucky trades, then please click the link below to get started now.
Steve Reitmeister's Trading Plan and Top Picks >
I wish you a successful investment world!
Steve Reitmeister…but everyone calls me Reity (pronounced “fair”)
CEO, StockNews.com and Editor, Reitmeister Total Return
Shares of SPY were trading at $503.53 per share on Tuesday afternoon, down $0.92 (-0.18%). Year-to-date, SPY has gained 6.27%, versus a % gain in the benchmark S&P 500 over the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in Reitmeister Total Return Portfolio. Learn more about Reity's background, along with links to his latest articles and stock picks.
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