General thoughts for the short term, summer, and rest of the year via /r/wallstreetbets #stocks #wallstreetbets #investing

General thoughts, not investing advice.

If you look at the second half of march conditions, it was primed to run a rally until April.

The market took a major hit the first quarter. In mid march, rebalancing of funds needed to occur. Equities had lost enough value where there was something like $230 billion plus in money that would be flowing into equities to rebalance. In mid march you had a perfect combination of the fed raising rates and quadruple witching. When the fed raised rates and gave hawkish guidance, people bailed on bonds. There was a rush to the door even. As that money flowed out of bonds, it had to go somewhere. Equities.

This pressure was amplified by option expirations that week. This was the pop necessary to spark a bear market rally (we were already in a bear market from a pure number standpoint). The volume after that was below average. Had the volume been strong, I might have been convinced we had actually hit the bottom. It wasn’t. The rally was very weak in terms of fundamentals. Heavy retail investor tilted, going into high growth stocks, particularly low margin, which makes zero fundamental sense. When a strong rally pops up after a big correction, and the rally has no fundamental basis, and lighter than normal volume, you have to start looking at technical analysis.

In order for this market rally to continue in April, it needed to significantly break through the 61.8% retracement that acts as a barrier in many such rallies. That way it becomes a technical analysis resistance floor rather than a ceiling that confirms such traders expectations. Unfortunately, the rally basically hit the 61.8% threshold right at the end of the month, just barely spiking above it briefly before pulling back, right as the month ended.

This is exactly the sort of thing technical analysis traders look for to change their bullish swing trades in the bearish direction and maximize profit. An April sell off was all but inevitable. The question is how far does that sell off run? For spy, we are approaching the first resistance level at 443-447. I think breaking through that this month is definitely looking likely. In which case there doesn’t look like much resistance again until 430. I think you’ll see some sideways movement or even some small pushes upwards there. A stabilization in the 430-437 range. But I also think at that point we will be heading into earnings and forward guidance will be bad. So going into may I think the losses will resume. I expect we look to try and break below 400 by the end of may. That’s a significant resistance level. a 100% continuation down is at 399. So touching that but not breaking too far below it for any length of time will tell us whether we break significantly lower in the summer or whether we slowly try to rebuild from there.

We aren’t currently on track for a recession in 2022. When yield curve inversion warning sign takes place, it tends to take a while to play out. History suggests we should end the year about where we are today or a little higher. We won’t see new highs this year (470 is a a very long shot) unless the landscape changes significantly. I don’t see that happening. Many of these problems are too ingrained. Inflation isn’t just going to resolve itself. The supply chain isn’t going to magically fix itself this year. The fed can’t just completely change course with these two things pressuring inflation upwards the way it has been and will continue to. The may get a little less hawkish if they spark off a liquidity crisis, which given how things are going, isn’t impossible. But they aren’t going to 180.

All this is to say that buying up high growth low margin stocks is a really bad play. It’s not going to work out. As forward guidance gets revised, interest rates start to play out in the real world, and the new normal starts to ACTUALLY get priced in (not just hand waving, but actual number crunching based on real world data), you’re going to see these type of growth stocks come back down to earth. They won’t get back to historically normal levels unless a crisis hits and the market washes out completely, but the multiples we’ve seen won’t survive. They can’t. The real world results and forward guidance will beat those numbers down kicking and screaming. Looking for stocks that have good numbers today and can keep producing solid numbers during tightening is where you want to have your money. Better yet are cash rich companies that can produce today/tomorrow AND keep investing in new ventures.

Obviously short term volatility will exist, and that means opportunities to make quick cash. But I think the volatility will favor the downside. There are more companies in a bad position in terms of price and expectations going into the cycle than there are good companies that are undervalued given the environment.

My general attitude is to get defensive, cash out when it makes sense, and look for potential crisis situations where the market could enter a panic sell off. That will create big opportunities. Where those opportunities are remains to be seen. It will depend on what type of crisis plays out, if any, and the basis for it. Given geopolitical events, this can happen at any time. The risks right now are to the downside in terms of good news vs bad news. I see more potential bad events that could play out than good. This means a higher likelihood of sell offs over booms.

Anyway, these are just the general thoughts I’m having about how things are looking as we head towards earnings, the summer, and 2023, which will likely have a recession. Recessions are inevitable, and 2022 has all the conditions to spark one. Circumstances could change, but again, the current conditions suggest a higher likelihood of an acceleration in that recession timeline rather than a reversal where we continue the boom cycle years further (and that this is only a temporary correction).

Over the really long term, we will be fine. So if your outlook is 5 years plus, this is all just going to be an annoying speed bump. But if the outlook is 2-3 years, this is going to be a stressful period is what I’m thinking. It’s something to think about anyway.

Submitted April 06, 2022 at 01:31PM by OutthinkingMyself
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