If you recall last week’s Market Commentary, it was titled “A ‘Catch-22’ Market.” The take-away was, “Well, on one hand I have to admit that price action is holding key levels and we are beginning to see early stages of growth begin the bottom; still too early to add. On the other hand, the pain that it might take to potentially get 1-3% higher is not great risk/reward, in my opinion.” This week, price action remained strong and the S&P 500 is now around 1% off the all-time highs. The week saw strength from every index. It wouldn’t surprise me to potential touch $4270-$4340 by mid June. You ask, “Jonathan, if you think the market is going higher, then why aren’t you adding?” Great question! There is a point where I have to be realistic about risk/reward. And to get potentially 1-3% higher short-term, will require a lot of risk.
We are in an environment where any news of tapering sends the market down (2-3)%. Some areas of the market have seen corrections (cryptos, meme stocks, and momentum growth), while the indexes haven’t really blinked. The S&P 500 only saw a pull-back of (4)% in May. The average intra-year decline is around (10)%, regardless of how strong the economy is. Remember, the market does best when the economy is struggling largely in part to low earnings expectations and Fed pumping money into the system.
We are in a peculiar spot, as price action is strong and the economy is rocking. In fact, jobless claims are now back to mid-March 2020 numbers. The fact is, I believe everyone is a bit surprised we recovered this fast across so many economic measures. The challenge we face now is the Fed is still purchasing bonds and putting money into the system. “Tapering” and worries of inflation are real concerns short-term. We will get through them. I am well aware of the argument that if inflation increases, then people should pay up for stocks as well. I 100% agree, but that doesn’t mean the normal average intra-year reset of (8-10)% decline doesn’t happen. I am bullish on the economy, but the market has rallied unbelievably during difficult times; a reoccurring theme! In short, I legitimately believe we could go 2-3% higher and likely stall mid to end of June.
The struggle is whether this is a good set-up for entries or whether we should be patient. I am opting for patience, although I love the price action that I am seeing. We continue to see rotations between value and growth stocks and key support is holding. One sector rallies while another sector takes a breather. This is classic bull market behavior. So, to put it bluntly, I am optimist on the likelihood of a strong year, but I am also aware of the probabilities of entering at better prices. There are opportunities, but I believe there is a better set-up to come. I am a believer in taking high probability set-ups. I believe there is some more gas in the tank short-term. I expect summer to be a bit of a grind and potentially have better opportunities in July. Unfortunately, probabilities show the longer we wait to reset the market, the worse the fall will feel.
Take a breather here… we see the normal (8-10)% reset every year. I don’t expect doom and gloom. I do believe we will be much higher in the market than we are currently by end of year. I am simply attempting to protect confidence for my clients. As promised, I do not charge when I sit in a cash-like position. Across the board, there are no fees for any clients for the month of May. Please know that this isn’t easy for me. I simply feel this is the right thing to do! You’ve been plenty patient and I need to improve! I am well aware.
Will seasonality line-up for a mid to late June pullback? We shall see… Thus far, we have followed this 20-year seasonality closely. Doesn’t mean it’ll happen this time.
Gaps tend to get tested sooner than later. These gaps below continue to be in the back of my mind! This doesn’t mean we don’t go higher first. Gaps eventually get tested!
Finally, regardless of what the news shows during the next downfall, remember this chart. The point? Never get too bearish!
I can’t thank you enough for your support! Better days ahead.
Enjoy the holiday weekend.
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DISCLOSURE STATEMENT
This post is for informational use only. The views expressed are those of the author, Jonathan M. Gurney. This material is not intended to be relied upon as a forecast, research, or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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