Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
After selling off ~16% over the past two months and reaching bear market territory, the S&P 500 is attempting to bounce from oversold levels. A few technical indicators we monitor support a continued rally in the short-term.
The bounce (within a dominant declining trend) is developing as the market seizes on messaging from the Fed that a pause could develop after two more rate hikes. The recent equity market weakness is likely a contributor to this “less-hawkish” messaging. For example, the Nasdaq has only exceeded its current stretch below the 200-DMA (-20% now) during one period (2008-2009 financial crisis) in the past 15 years. Hence, a bounce was due.
However, there remains much uncertainty regarding inflation, which will ultimately be a significant influence on the path of the Fed. Consequently, it will be a large determinant on whether or not the market lows have been seen, along with the timeline for equities to rebuild themselves for renewed upside. And investors will remain hyper-sensitive to inflationary data points moving forward, as its trajectory results in a wide range of potential outcomes over the coming months.
Accordingly, we are treating this as only a bounce for now. Nonetheless, there is plenty to do as the market rallies. Traders can finally play the long side. We suggest using high-beta stocks, which can see meaningful price moves from depressed levels. Longer-term investors can accumulate favored, quality names; and consider lightening holdings they desire to reposition in the rally. Also, watching how certain stocks and sectors trade during the bounce will help formulate positioning for the inevitable elongated rally that stocks will see on the other side of the current weak trend, regardless of where or when the market finds the ultimate low.
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