Silver Linings in a Range-Bound Stock Market

The S&P 500 (SPY) continues to retrace the spectacular 10% rally in March. Now, we have given back about 50% of these gains. In many ways, this type of back-and-forth price action can be frustrating, but it should be expected in range-bound markets. And, if we take a step back, the market action could be construed as healthy given the strong gains from March 2020 to January 2021. These gains could be digested in multiple ways. And many of these would be much more destructive than the current 8% decline or so from the top and months of choppy trading. At the same time, there have also been some opportunities that we have been able to capitalize upon. In today’s commentary, I want to share some reasons that I’m feeling more constructive about stocks and why we could be nearing the end of this corrective period. Then, I want to preview some moves I’m considering. Read on below to find out more….

(Please enjoy this updated version of my weekly commentary published April 15^th, 2022 from the POWR Stocks Under $10 newsletter).

First, let’s review the past week…

Over the past week, the S&P 500 is down about 2.5%. Another 25% of the March rally unwound like last week.

Interestingly, the Russell 2000 was an outperformer as it finished the week flat, while the Nasdaq 100 was down close to 4%.

What’s interesting is that after the initial drop lower, we basically traded sideways. Despite a close at the lows today, we remain slightly above Wednesday’s lows.

Resilience

This is the word that comes to mind when I think about the market and the economy.

There have been significant headwinds in the form of high inflation, a hawkish Fed, and geopolitical risk. Add to this, an overbought and overvalued stock market that was ripe for some sort of selling pressure to get back to a healthy equilibrium.

Something similar can be said for the economy. Yes, there is slowing, but I don’t see recession as being a possibility at the moment, especially with unemployment claims at close to historical lows.

Silver Linings

I’m a contrarian by nature. It’s a blessing and a curse.

But, I do think it prevents my mind from being rigid and identifying risks in a strong tape and opportunities in a weak tape.

So, I can’t help but talk about 3 marginally positive developments that have taken place over the past week.

And, I believe these are significant enough to justify a more aggressively bullish stance on the markets.

The first is that Russia is moving the bulk of its forces away from Kyiv and into the disputed, Donbas region. This is a reflection that Russia is downsizing its ambitions from taking over the whole country to a smaller area with which it can ‘declare victory’.

Still, likely to be a lot of tragedy and bloodshed, but I do think this reduces the tail risk of a conflict that escalates into something larger with multiple actors getting involved.

Next is the inflation report. The market gapped up and then sold off during the day to finish red on the day. Yet, I believe the initial impulse was correct as the report finally showed relief in terms of some of the pandemic-driven categories.

But, these improvements were more than offset by higher food and energy prices.

For me, it was simply a sign that capitalism still works. Higher prices lead to more supply which leads to lower prices.

This process has been short-circuited by the pandemic and the supply chain issues which have persisted for much longer than I thought likely. But, I do think we are at an inflection point and should only see improvement from here going forward.

The final is the first wave of Q1 earnings reports. It’s less about what is specifically in the reports and more about what isn’t there – any sign of a slowdown that would lead investors to fear that earnings will decline in the coming year on an aggregate basis.

Yes, profit margins are down from a peak of 13.1% to 12.1% but this is far from disastrous and still on the high-end.

Next Moves

2022 has certainly been much more challenging than 2021 and 2020, but I think we’ve done a good job of navigating it, in terms of tapping the brakes and stepping on the accelerator when appropriate.

Based on the positive developments mentioned above, I think it makes sense to tactically increase our exposure.

Some of the areas that I find most intriguing are luxury spending, beaten-down retail stocks, and financials. I continue to like energy and metals but we already have exposure to these areas.

Further, these are close to their highs, while there are opportunities to buy stocks that are off by a more significant amount.

I’m enamored of several stocks on my watchlist, especially from a bottom-up perspective. I believe that they’ve been held back by the bearish market conditions, so any stability or recovery for the broad market could be the catalyst to unleash them higher.

Depending on how next week shapes up, it’s likely that we will be putting some of our cash to work.

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All the Best!

Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter

SPY shares closed at $437.79 on Friday, down $-5.52 (-1.25%). Year-to-date, SPY has declined -7.54%, 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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