How Long Will the Current Market Roller Coaster Continue? Market conditions in 2022 are dramatically different than what we encountered in 2021. Only time will tell if this is a correction or a bear market, but it's beyond obvious...
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Market conditions in 2022 are dramatically different than what we encountered in 2021. Only time will tell if this is a correction or a bear market, but it's beyond obvious that this is more than a garden-variety dip. In today's commentary, I want to discuss why I think the near-term outlook for the S&P 500 (SPY) remains risky and what it would take to change that opinion. Then I want to discuss the changes in our strategy. Read on below to find out more….
(Please enjoy this updated version of my weekly commentary published January 28, 2022 from the POWR Stocks Under $10 newsletter).
First, let's recap the past week:
Over the last week, the market has been quite volatile. Overall, the S&P 500 is down another 3.2%, while the Russell 2000 and Nasdaq are lower by 4.4% and 5.6%, respectively. Of course, this is a continuation of last week's market action which also saw pullbacks of similar magnitudes.
What's interesting is that that these losses have come about as the market has been in the midst of a bottoming attempt since last Monday. So far, I'm not impressed.
On Monday, the market had an impressive bounce off the 4,220 level and eventually reached 4,453 in the initial moments following the FOMC decision. However, the bulk of these gains have been lost in the ensuing sessions.
Here are some reasons why I think this bounce attempt will rollover…
- Short-term yields on Treasuries continue moving higher
- Inflation data remains stubbornly strong
- Economic growth data is likely to soften
- Earnings season is so-so but certainly not strong enough to shake the market out of its doldrums
- Ideally in bottoming attempts… you see massive accumulation. I can't help but notice that every day including Monday has seen negative breadth. My interpretation is that the market remains under distribution.
And to be clear, if this was a dip or even a garden-variety correction, then I think we have reached sufficient levels of the market getting oversold and fear that it would make sense to get bullish from a contrarian perspective.
But, I do think this is different…
We have the normal uncertainty of the Fed beginning a hiking cycle and one that is going to be much faster and steeper than previous iterations with less room to maneuver.
On top of that, we are going to encounter strong inflation data while economic data softens. And this is the crux of my argument – the worst case scenario for the stock market is falling growth expectations while interest rates rise. Even the whiff of this can cause stocks to plummet… and that is my fear at the moment.
What would change my mind…
If we start seeing more accumulation or bullish price action, then I would be more inclined to turn bullish. A close above the 200 day moving average. Or a legitimate washout in the markets.
All of these would be indications that the negatives are fully priced into the market.
After all, I do believe that the bull market is well and alive… just in a hibernation phase.
Changes in Strategy…
As we've discussed the last couple of weeks, the change in market conditions necessitates a change in our strategy.
I think this is prudent for any sort of trading or investing but even more germane for our portfolio of stocks under $10. These stocks tend to be among the worst performers during periods of market turmoil because there is very little institutional participation.
This volatility is also what creates opportunity and outperformance as traders inevitably overdo it on the bearish side.
So our main focus is on finding the next big batch of winners to buy once the market environment starts improving.
What To Do Next?
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All the Best!
Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter
SPY shares closed at $441.95 on Friday, up $10.71 (+2.48%). Year-to-date, SPY has declined -6.95%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini's background, along with links to his most recent articles.
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