It’s been a fine week for equity markets and if the debt ceiling issue is resolved without much hassle there could be a further recovery. It goes without saying, but it’s a lot easier to make money when the S&P 500 (SPY) is rising, even though our portfolio is less correlated to the broader market than large caps. However, we made other changes to the portfolio this week to prepare for the future. Read on for my latest take on the current market conditions and how I think going forward.
(Please enjoy this updated version of my weekly comment originally published on the POWR “Stocks Under $10” Newsletter.).
As I mentioned above, stocks are looking much stronger this week. While the debt ceiling is the main concern for investors, there is a good chance it will be resolved before an actual default occurs.
Once the self-inflicted drama is over, the focus will return to inflation, Fed meetings and other economic news.
Summer tends to slow down market activity. However, this year could be a little different as the summer FOMC meetings are closely watched.
As I said last week, I prefer a broader view of market conditions rather than looking at daily movements.
The S&P 500 (SPY) has had a nice week so far, but as you can see in the chart above, we’re not even 2 standard deviations away from the 50-day moving average.
Of course, that doesn’t mean the rally will continue. However, we also haven’t seen any significant increase that warrants some profit-taking ahead of the weekend.
Economic and earnings news was fairly uneventful this week. Walmart (WMT) delivered stronger-than-expected results and raised earnings and revenue guidance for the year.
Retail sales in April were also solid. All in all, the consumer spending situation continues to look positive.
With the economy remaining resilient, it is difficult to say whether the Fed will hike rates at the next meeting (in June).
The market is about 65% certain it won’t hike rates, but that could change fairly quickly based on new economic data.
I don’t think we need another quarter point hike, but the Fed doesn’t generally ask for my opinion.
Getting to grips with the default (the debt ceiling thing) might change the Fed’s mind, but again, I don’t expect an actual default to occur.
Gold’s fall below $2,000 an ounce seen above could be a sign that investors are less concerned about investing in safe havens.
The VIX (the market volatility index) also continues its slow downward trend. The VIX will see short-term spikes due to one-off news events.
However, the general direction will be down or sideways most years (depending on what year we had before).
As you can see, the VIX is approaching the 16 mark. That means stocks are moving about 1% per day. Below 15, a low volatility environment generally applies. Assuming nothing crazy happens with the debt ceiling or the Fed, we could get there this summer.
What do you do next?
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All the best!
Jay Soloff
Chief Growth Strategist, StockNews
Editor, POWR’s Stocks Under $10 Newsletter.
SPY Stocks. Year-to-date, SPY is up 10.04%, while the benchmark S&P 500 index posted a percentage gain over the same period.
About the Author: Jay Soloff
Jay is the senior options portfolio manager at Investors Alley. He is the editor of Options Floor Trader PRO, an investment consultancy offering you professional options trading strategies. Jay is a former professional options market maker in the CBOE and has been trading options for over two decades.
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