Wednesday Weakness – One Month of Gains Gone

I am so glad we cashed out!  

Thankfully, despite the pullback, we’ve managed to make a bit of money as we got very bearish on the 16th, when the S&P 500 chart looked like this:  

It looked pretty good, right?  So why did we cash out?  Well, clearly we were at the top of our predicted range (now back to the middle) and you can see the declining volume.  You can also see the RSI and MACD studies both hitting peaks and, as I said at the time:  “We haven’t had enough changes in the macro data or earnings to change our minds that this (4,320) is likely to be the top of our range for the rest of the year.“

You can’t keep ratcheting up your expectations just because the market (or a stock) goes higher.  Yes, there are always traders willing to play the greater fool game, buying stocks too high and selling them too low – but you don’t have to be one of those fools.  As I pointed out, regarding our Money Talk Portfolio, you have to keep your eye on the risk/reward ratio:

“So, if were up to me today (8/16), I would cash out and start from scratch and that’s the decision you should be making with every single position you have when there’s a rally because look how drastically our risk/reward ratios can change.  We went from having 154% upside potential to just 60% yet the risk is the same – so it’s very simply no longer worth it – no matter how much we love our positions.”

The market didn’t really begin to fall off until Thursday, when another 0.75% rate hike and promises of more to come turned the market mood very sour.  Also, we’ve had a continued property melt-down in China, more Covid lock-downs in China and Natural Gas topped out at $10 – keeping inflation at 40-year highs despite all the rate hikes.

All that has caused us to retrace half of the rally we’ve had since June, which had recaptured half of the losses for the year (from 4,800) so, on the whole, we’re still down about 16.66% for the year on our indexes and less than 10% off the lows.  

Keep in mind that 4,000 is our “Fair Value” line for the S&P and yes, we did know China’s property market collapse was going to start hitting their GDP and their Banking Sector – that was factored in.  We did know Russia was at war with Ukraine and they were going to hold Natural Gas hostage – factored in.  We did know Covid wasn’t gone and there would be more lockdowns and we certainly knew the Fed was going to be hiking – we’ve been adding 3% to corporate interest payments in all our forward projections.  

So it is what it is but, just because 4,000 is fair value for the S&P 500, doesn’t mean we can’t go 10% lower – just as we went 10% higher (8% actually was our projection).  Outside of that – consider us surprised – in either direction.   So, if we KNOW where the top of the range is and we KNOW where the bottom of the range is – the rest should be easy, right?  

That’s why we haven’t added many stocks back to our portfolios in the two weeks since we cashed out – despite the fact that we’d really like to.  Frankly, I’m not seeing too many compelling bargains – not like we had at 3,680 – when we were buying like crazy (see our Top Trade Alerts at the time).  

This is a bit of a quiet period into the Fed’s next meeting on the 21st but it is time to go back and review the things we liked back then – to see if they got cheaper and are still attractive.  We discussed many of those trades in July 20th’s:  “PhilStockWorld Top Trade Review – Q2 2022” as well as July 13th’s: “BNN Money Talk Portfolio Review“, where our watch list was (comments relate to whether or not they should be added to the MTP that day): 

• LEVI is almost certain: https://www.philstockworld.com/2022/06/21/two-percent-tuesday-weak-bounces-accomplished-now-what/#comment-8125624

• CROX is good too: https://www.philstockworld.com/2022/06/21/two-percent-tuesday-weak-bounces-accomplished-now-what/#comment-8125627

• WSM is worth mentioning but too expensive: https://www.philstockworld.com/2022/06/21/two-percent-tuesday-weak-bounces-accomplished-now-what/#comment-8125628

• RH has the same price issue: https://www.philstockworld.com/2022/06/21/two-percent-tuesday-weak-bounces-accomplished-now-what/#comment-8125629

• BBY is a good one “Winter is coming!“: https://www.philstockworld.com/2022/06/21/two-percent-tuesday-weak-bounces-accomplished-now-what/#comment-8125678

• TROX I was loving in the same comment as BBY.

• NFLX too expensive but worth a mention.

• F is a strong contender: Two Percent Tuesday – Weak Bounces Accomplished – Now What?

• SONY is another good one: Which Way Wednesday – Powell has some Splainin’ to Do to Congress

• BIG is also interesting: https://www.philstockworld.com/2022/06/30/faltering-thursday-powell-says-fed-must-accept-higher-recession-risk-to-combat-inflation/#comment-8126520

• MT may be a winner! https://www.philstockworld.com/2022/06/30/faltering-thursday-powell-says-fed-must-accept-higher-recession-risk-to-combat-inflation/#comment-8126531

• LOGI still stupidly cheap (same link).

• DIS should rate a mention: https://www.philstockworld.com/2022/07/07/federally-forgiven-thursday-light-at-the-end-of-the-tunnel/#comment-8126814

• We talked about IMAX in that comment too.

• THC we just added to the Earnings Portfolio: https://www.philstockworld.com/2022/07/07/federally-forgiven-thursday-light-at-the-end-of-the-tunnel/#comment-8126820

• And, of course, JPM.

So it’s still a great list to go by and not all of them have gotten away yet so we’ll be circling back on these stocks to see what we can add and, of course, the best use of funds in this kind of market is to improve the positions we already have.