Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Following the sharp pullback from the 200-DMA over the last few weeks, the market has been able to find some footing around the 3,900 area after getting oversold, which gave a valid excuse for a bounce rally. Overall, we believe the 3900 level is a critical junction for the market. For now, the downtrend remains in place, and while bounce rallies, like the one we are experiencing are possible, we will wait for more clarity on the path of the Fed, inflation, and macro, which we believe could be upcoming catalysts with inflation readings set to be released next week followed by the FOMC’s decision on September 21st. In the near-term, technicals will be useful as they will be impacted by the daily sentiment as the debate between the bulls and bears continues. We will also watch the US Dollar closely. The US Dollar has been strong lately, which has been a headwind for equities, as over the last year the S&P 500 price has seen an inverse correlation of 0.80 to the performance of the US Dollar. In the event that the dollar could see the pace of acceleration moderate, this could be another positive for equities.
If the 3900 level is held, we believe this raises the odds that the lows are in despite our belief that the macro and earnings can continue to move lower. There have been several accumulation readings along with the retracement of 50% following a 20% decline, which have historically coincided with lows being established.
From a fundamental standpoint, earnings season is not expected to kick off for another month. 3Q 2022 earnings growth is expected to be the slowest YoY growth in 2022 at 4.3%. While the challenging economic environment and lower earnings expectations present headwinds to the market, we do believe that equities will bottom (or may have already bottomed) before the economy and fundamentals finish declining as stocks discount the future. Historically, the market bottoms 2-6 months prior to the end of the recession while earnings continue to move lower and do not bottom until ~9 months after the end of the recession.
However, if the 3900 level fails to hold, technically the market could move towards the mid-3700’s and possibly see a formidable test of the June lows. The overall downtrend remains in place with lower highs, failure to break above the 200-DMA, and price below both the 50-DMA and 200-DMA. If this does happen, we do not expect a 2001 (dotcom bubble) or 2008 (credit crisis) type market where significant bear market rallies preceded much lower prices and volatile/confusing data remains likely. For now, with the litany of potential issues on the horizon and September historically being one of the weakest months for equities, we would continue to be patient, but for long-term investors would continue to use pullbacks as buying opportunities.
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