Stock Market Deja Vu My last two commentaries were spent on the very topic that is unfolding now. That the S&P 500 (SPY) seeming breakout above 4,200 was premature with a likely pullback to follow. And then how the market goes through a normal cycle to wash out excess, which helps store up energy for the next bull leg higher. So for as much as I hate repeating myself, I will need to do a bit of that this week to get your heads properly wrapped around the current market environment. And thus prepared for what lies ahead. Read on below to find out more….

(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).

As shared in Friday's commentary, the break above 4,200 was not as solid as it seems. Sure enough the script was flipped Monday with a pretty broad based market sell off with the S&P declining over 1% to a close of 4,188.43.

Even worse was the tech stocks in the Nasdaq down -2.53%...and even worse was just the state of all riskier, smaller, growthier stocks in the Russell 2000 down -2.59%. And yes, the downward trajectory continued Tuesday with the S&P being trimmed by almost another 1%.

What does it all mean?

Business as usual.

Long bull runs > points of resistance > consolidation/sector rotation (sometimes that degenerates into 3-5% pullbacks or even 10% corrections > build energy for the next breakout to new highs.

Yes, that is a long chain reaction...and yes, it doesn't always go in a logical progression. Yet the general idea of how it happens is what is taking place now.

This also aligns well with the technical picture where one would not be surprised by a 3-5% pullback at this stage of the game. That percentage decline is spot on with where the 50 day moving average stands now at 4,046. That would represent a 4.5% correction. And just a little jaunt down lower to the psychologically important 4,000 could be all this market needs to wring out excess and ready to move higher.

Reity, should we trade this move?

No. I have no intention to do so. Because this is what MAY happen. Not what WILL happen. In fact, without a crystal ball or time machine, there is no way to know with certainty how this will play out.

For example, what MAY happen is that stocks don't retreat anymore and its really just more sideways trading and sector rotation and then lift off above 4,200 in the not too distant future.

Or maybe we just blast off higher tomorrow given the non-stop train of positive economic reports. Or the fact that we are coming off the "Best earnings season in 10 years" according to my friend Nick Raich at EarningsScout.com.

This gets back to the heart of the commentary last week. So again, I hate to repeat myself...but it's really vital information that deserves repeating:

"So yes, 4,200 will prove to be a spot of resistance followed by some combination of pullback, consolidation, sector rotation. Or in other words...VOLATILITY.

We have seen this 1001 times before. And we will see it 1001 times more in the future. The point being this is the natural way of the market.

Rally > Resistance > Consolidation/Sector Rotation (aka volatility) > Build Energy to Breakout to New Highs.

Reity, why are you so confident this time isn't different?

First, it is rarely different. And when it is you will see greater bearish catalysts at play.

Second, because I have been investing for 40 years so I have seen this 4004 times or more.

Third, low interest rates still make stocks 2.5X more attractive than bonds. (really...this is the biggest reason making it fairly unnecessary to continue the conversation...but we shall to lock this lesson into place).

Fourth, coming off yet another strong earnings season. Ample details shared in last week's commentary.

Fifth, economic data continues to show improvement across the board. I have detailed this week by week in commentary. And most recently you have another strong monthly ISM Manufacturing report. No doubt ISM Services and Employment reports later this week will continue to point to continued economic expansion.

Sixth, the Coronavirus #s in the US are dropping as vaccine adoption is well ahead of pace.

Seventh, Biden's State of the Union address was filled with lots of items that would spark economic growth. This is not Steve Reitmeister, or other Wall Street experts, agreeing that these are the RIGHT policies. It is simply a clear eyed view that the government checkbook is WIDE OPEN which is stimulative to the economy > corporate earnings > share prices.

There is no reason to go beyond this point because the above is plenty good enough. So our game plan is to keep our calm and act like we have been there before (cuz we have ;-) )

This will allow us to not get shaken out of our quality stocks during this volatile period. Instead we will hang on with great confidence that they will rebound with gusto when the next bull run emerges. And if any great buy the dip opportunity emerges, then we will quickly take action."

(End of last week's commentary)

The only thing to add beyond this is that indeed the economic data continues to sing a song of steady improvement. Last Wednesday ISM Services came in at a very impressive 62.7. Even better was the 63.2 reading for New Orders. And even better is the continued rise of the Employment part of the index.

Today the Small Business Optimism Index rose for the 3^rd month in a row after hitting a low of 95 in January. The truth is that Republicans dominate the ranks of small business people and they were not a very optimistic group in January for obvious reasons.

Gladly now the further away we get away from the oddities of this election, the more they see the positives taking place in the economy. This optimism generally translates into higher spending and greater levels of employment. Those have clear benefits in helping to fuel the future growth of the economy.

The only oddity of last week was how ADP Employment impressed with 742,000 jobs gained. While the Government Report on Friday was lackluster at only 266,000 jobs gained.

Again, I hate repeating myself, but this one is easy. The for profit report from ADP is right and the Government report is wrong. Why? Because for profit companies are ALWAYS better than the Government at EVERYTHING. (I will now descend from my soap box)

So yes, we have hit resistance at 4,200. Many ways this can play out. But the most likely way is a fairly shallow and short lived pullback followed by making our way to new highs this summer. And likely end up 4,500+ by years end. Even 5,000 not out of the question given how low rates makes stocks the vastly superior investing choice. And thus we continue to have a bullish bias in our portfolio.

What To Do Next?

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Wishing you a world of investment success!

Steve Reitmeister

…but everyone calls me Reity (pronounced "Righty")
CEO, Stock News Network and Editor, Reitmeister Total Return

SPY shares were trading at $411.17 per share on Wednesday morning, down $3.04 (-0.73%). Year-to-date, SPY has gained 10.33%, versus a % rise in the benchmark S&P 500 index during 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 the Reitmeister Total Return portfolio. Learn more about Reity's background, along with links to his most recent articles and stock picks.

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