(Please enjoy this updated version of my weekly commentary originally published April 20th, 2023 in the POWR Stocks Under $10 newsletter).
Yes, the stock market really has been a bit confusing lately, hasn’t it?
In spite of all the bad news – the mini banking crisis, rising geopolitical tensions, predictions of a recession – the stock market has been doing surprisingly well in 2023.
(Please note I said “the stock market” has been doing well… not “stocks.” There’s a reason for that. More later…)
The market’s resilience is an example of a concept called the “pain trade,” which is a phrase I’d heard before but never really saw so perfectly in action until now.
The best way I’ve seen it described was like this: “The goal of the market is to extract the most amount of pain from the greatest number of people.”
Essentially, when everyone is bearish, the pain trade is for stocks to go up. When everyone is bullish, the pain trade is for stocks to go down.
And as we’ve discussed for months in this letter, there was perfectly good reason for everyone to be bearish.
A month ago, everyone was freaking out after the failures of Silicon Valley Bank and other regional lenders, and the CNN Fear and Greed Index was deep in the “fear” category.
It makes sense that everyone was waiting on the sidelines. (Remember, most people were ultra bearish at the end of 2022, which is when we saw people flee the market in droves.
Since they’ve already sold, they can’t sell again… which is why we’re not seeing another major selloff accompanying March’s negative sentiment.)
But now sentiment is improving, with more and more people starting to feel optimistic about the market.
Or a least that they’re missing out on all the gains and are willing to risk dipping their toes back in the water, recession be damned.
These hesitant “bulls” are the ones buoying the market at a moment where we’d likely see the weakness we’re all talking about show up on the charts.
That brings me back to my earlier point that “the stock market” is doing well, and not “stocks.” You see, “stocks” aren’t really doing that great.
A number of analysts are concerned that this rally is much more vulnerable than it appears to be.
Part of that is because market breadth has been weak. As of last Friday, less than half (45%) of Russell 3000 stocks were trading above their 200-day moving averages.
That matches up with news that this rally has largely been carried by a handful of mega-cap stocks like Microsoft and Apple.
We’re also seeing low volatility – VIX is at its lowest since the beginning of the year – which could mean investors are possibly too complacent and stocks could be heading for a selloff.
For volatility to revert back to the mean, we’d have to see some kind of selloff in the S&P 500 (SPY).
That lines up with the many analyst notes we’re seeing warning investors that even a mild recession would result in a substantial market selloff. Many believe that we’d retest the October 2022 lows – or a drop of more than 15% from current prices.
Those experts are recommending that clients stay underweighted on stocks and overweighted on cash, which is exactly where we are now.
Personally, I’m still more bearish than bullish, which I know seems to be the popular choice. But I’m still a believer that we can make money owning certain high-quality stocks.
Looking forward, the next three weeks of Q1 2023 corporate earnings reports and forward guidance for the rest of the year should hopefully help bridge the gap between the resilience of markets and the reticence of investors.
Despite my bearish leanings, I’m always on the lookout for new portfolio additions that fit our portfolio mandate.
We’ll see what we can scare up in the next few weeks as companies continue to report earnings. Keep an eye on your inbox…
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All the Best!
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter
SPY shares closed at $412.20 on Friday, up $0.32 (+0.08%). Year-to-date, SPY has gained 8.20%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Meredith Margrave
Meredith Margrave has been a noted financial expert and market commentator for the past two decades. She is currently the Editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Meredith's background, along with links to her most recent articles.Bears Have a Front Row Seat to the "Pain Trade" appeared first on StockNews.com