After an exceptionally ugly April 2022, with the S&P 500 (SPY) down -8.78% and the Nasdaq (QQQ) down -13.60%, market ugliness continued into May – just not as dramatically. So far in May (through the 25th) the SPY is down -3.55% and QQQ is down -7.02%. I should say it is possible that both indexes could improve going into the end of the month, but that is where we are as of today.
The big picture still isn’t looking great for both the stock market and the economy. The Federal Reserve raised interest rates by 0.50% on May 4th which was considered by many to be a more aggressive move than the usual 0.25% increase. But what comes next is of more interest to us. We think it is possible that the next rate increase could be as high as 0.75% (instead of the 0.50% that is expected by most of the Wall Street crowd). In either case, we’re curious how that is interpreted by investors: will it be seen as a time to buy, or does it lead to selling and the next leg down in the market?
Leadership rotation in the market continues. The Nasdaq had been the strongest index when the market had its various corrections over the past several years. It has been weakening since December 1st 2021. Now it has dropped below the drawdown it experienced during the 2020 covid crash. Ouch.
Meanwhile, the S&P’s drawdown (movement from its last peak to its next low) dipped to -18.22%. If and when it gets down below -20%, then it would be considered a “bear market.” We’ve always found that by the time this is announced, it is usually far too late to do anything about it. Meaning, if you haven’t already done some selling, doing it now might be the wrong thing to do.
However, if we are indeed in a recession, then we could have another -20% (or more) drop before this is all over. And a lot has to improve, from inflation, interest rates, to the overall economy, to make that happen.
Our Shadowridge Mid-Term Cycle signal and Long-Term Trend signal have both been negative for most of May. But, the Mid-term cycle is now currently positive, suggesting we might be in for a short-term bounce or move back up in the markets. We are still largely in Cash and Money Market at the moment but are looking for reasonably safe funds to hold while this all plays out.
As of Wednesday night (May 25th, 2022), our Shadowridge Dashboard showed Positive to Negative sectors as 2 to 9. That’s still not a great reading for the market, but this is the first time in a while that more than 0 or 1 sectors were positive. It is possible we may see a few more sectors move that way soon.
For this month’s chart, I want to show the comparison (often referred to as Relative Strength) of the Nasdaq (QQQ) and the S&P 500 (SPY). When the black line is rising, then the Nasdaq is stronger. When the black line is falling, then the S&P 500 is stronger. We’ve added a 5 day (1 week) line in red and 21 day (1 month) line in blue to smooth out the movement. Since November 30th, 2021, the Relative Strength peaked, as you can see by the high point near the middle of the chart. It has been falling ever since – meaning the S&P 500 has been stronger since then. This is opposite to how it looked in the 2020 Covid crash and the Q4 2018 corrections.
Bonds – the Aggregate Bond Index AGG is still down -8.24% YTD in 2022. The 7-10yr Treasury bond index is -8.91% this year (FastTrack Data). But both of these have shown a slight improvement from where they closed last month. Last week we even bought a small amount of the AGG (Aggregate Bond Index) in one of our models. We’re not expecting it to be a long-term holding, but we are trying to catch some of the rebound from it being so far oversold.
Bottom line – we continue to be largely out of the market, but we’re looking for ways to reasonably add exposure that we can exit quickly if we don’t get the short-term bounce we’re expecting. As always, we prefer to play it safe when the markets are as crazy as they are right now. But there can be opportunity in the “crazy,” so that is what we’re looking for.
Stay safe out there!!
Don’t forget to catch our monthly webinar, where I dive deeper into what I have mentioned in this newsletter commentary. For me, nothing tells the story as much as visuals, so I really enjoy the webinar for digging into what we’re doing with investment decisions. Will, Phil, and Laura will also be presenting timely topics to help you face life’s financial challenges and opportunities. We hope you can join us – Thursday, June 9th at noon Central time.
You can sign up for the webinar here. We look forward to seeing you there!
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1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.