S&P500 at the trigger point of 2 scenarios identified last month... get ready!

Hi folks, the S&P500 got the consolidation that I was looking for based on the Market Outlook we gave on 21 March 2022.

In the Market Outlook "Will we go into a bear market because... Russia?" ...

... we outlined that we thought the odds of a bear market recession was low based on macro economic indicators that that majority of signals that usualy preceed a bear market was close to signalling but not yet. Hence, we expected a consolidation / correction first before a resumption of the bull market, especially as we note out certain risks may play out, like the Russia Ukraine conflict. Now we add that China is locking down again because of COVID, and the FED posturing to raise rates by 50bp.

Note that this behavior is consistant with out beginning of year Market Outlook where we called 1H22 to be "weak and whippy" and 2H22 to be stronger, as most of these uncertainities become more certain, allowing investors to better calculate their risks and returns. We said so because we deemed the markets expensive on many measures, and growth stocks very expensive on earnings as the institutional sentiment of "growth" was becoming much more demanding in a rate raising environment. We also thought that we know the the rate raising environment is always the "first roar" of a bear market, and so we gave an example that "overweighting defensive value" that are so cheap with cashflow that they do significant buybacks AND "raising 30% of cash" to take advantage of of big corrections will most likely "outperform the markets". This advice, has been pretty much spot on. Defensive value was ranked the top in relative strength since the beginning of the year, and now we do have that correction! Back to our Market Outlook on 21 March 2022,

For those that attended the live Zoom or watched the (recorded one), we correctly said we expect a consolidation it's most likely either scenario 1 or 2. We clarified in our Zoom webinar that Scenario 1 simply means that there will be a correction that won't take out the recent low (our illustration was a shallow consolidation, but we emphasized a consolidation not the size of it). We said a scenario 2 is also possible where major supports are taken out, and there might be a natural extension to a H&S pattern failing. You can still get this longer correction and still be in a bull market, but this usually comes with weakening data for 1Q, or new rumblings of risks (like more COVID lockdowns).

With the data present at that time, we gave it a 45:35 ratio, or approximately 60:40 if we ignore the 20% of a bear market recession. We said to raise some cash if you want to play this correction and so the time is coming to decide what to do. As of today, I still think the probability of recession is too early to call.

Long story short, it's difficult to give probabilities because market timing is half art and half science, so I'll give my thoughts here.

Probability wise, if there is going to be a short term bounce, it should happen in towards the end of the week. We are on strong support NOW. However, the difference between the last bounce and this one is that this is the second time we touched it, thus is support is "weaker". Additionally, the other sentiment indicators are not on ideal extremes that precede big bounces. This leads me to think the ratio is not 60:40, but more 45:55, because of the added uncertainties not present last month.

This makes me take a wait and see attitude to decide when to deploy additional funds that was correctly raised earlier this year. Ideally, I want to see a sharp reversal this week, if not, it's quite possible to bounce slightly on these levels because drifting lower to the 3900-4000 level on the SPX. Either way, we positioned ourselves to outperform the markets because we advocated defensive value (which outperformed the markets so far) AND to raise cash (~30%) to take advantage of corrections; which we stated at the beginning of the year.

Intermediate Leanings: If we do get to the 3900-4000 level, I suspect the news cycle will be on issues that threaten a recession. As such, there might be a continued "buyer strike". As stated at the beginning of the year, you can hedge of the bearishness of the market by choosing stocks at good valuation (either defensive in earnings, or your DCF indicates great returns), AND are in position to do significant share buybacks this year. These stocks are likely to recover quicker, and even if the markets drift lower, they will likely not drop as much as the others. If it does get to the 3900-4000 levels, it is likely good reward-to-risk to be looking for buying signals if you are a trader. The signals can be technical in nature (great candlestick set up, momentum changes), or significant fundamental news that makes your bull case stronger (like better than expected earnings, or increased share buybacks). We will be on the lookout and determine when the time comes.

We still think things should get better in 2H22 when there are less uncertainties, giving a chance for investors to invest into companies with good valuations (there are still some around).

Everyone take care! BTW, companies that are relatively cheaper than the markets, have good cash flow, have manageable debt, and have or are about to have signficant share buybacks... the ones I would consider if the markets continue to pull back... here are some examples;

VST (utility)

ET (midstream)

CXW (Private prison)

KLIC (this one is a little more cyclical - semi)

Each have their own stories and their own risks so I encourage you to read up on them to further filter them out.

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