(Please enjoy this updated version of my weekly commentary published August 18th, 2022 from the POWR Stocks Under $10 newsletter).
Over the last week, the S&P 500 (SPY) is up a little more than 1%. Although prices are higher, there are some subtle changes under the surface.
Market breadth has been quite weak on the move higher, and leading sectors have pulled back sharply.
Still, the broader market remains firmly in a pattern of higher highs and higher lows. To be frank, I don’t have a particular bias about the market’s near-term direction.
As noted in the intro, I’m willing to stick to our current positions and allocations above 4,200 but would definitely do some profit-taking if we dip below those levels.
Now let’s look at various market topics…
Auto Parts
One silver lining is that auto production is back to full capacity. This has multiple benefits including a boost to economic activity and relief on the inflation front as vehicles make up about 11% of CPI.
In our portfolio, we have targeted auto parts stocks and are up 30%+ on 2 positions. And, this tailwind to earnings should persist for multiple quarters given that cars were underbuilt for so long.
Energy
Energy has been interesting, and the market has had considerable divergence.
But, the major headlines is oil below $90 which seemed inconceivable a couple of months ago. In fact, many commodities are now below pre-Russian invasion prices.
The major factors are that Russian oil is being bought into the market, Chinese demand is down, and the SPR release. Another potential bearish catalyst would be an agreement with Iran.
On the bullish side, the long-term tightness in the oil market still remains especially if Chinese demand picks up as it should at some point.
European prices for electricity and natural gas continue to rise and could cause a crisis in the case of an extreme winter.
Finally, it seems unlikely that energy prices won’t start rising if the recovery continues. And at some point, higher energy prices could lead the Fed to short-circuit the recovery as it was the crux of the inflation problem.
Biotechs
The biotech ETF, IBB, was up nearly 30% until early this week. Since then, prices have pulled back along with other growth stocks.
Although, some near-term consolidation is likely, this sector remains my pick for outperformance in the next bull market (regardless if its started already or we have to wait a few more months).
In fact, it reminds me of energy stocks in the spring of 2020 which is a sector that no one was really interested in and was being ignored by institutions.
Biotechs are in a similar place and offer tremendous value, while all the longer-term growth catalysts remain intact.
Travel
Another part of the market that I continue to like is the travel sector. Travel is booming which is clear from the earnings reports of hotels and online booking sites or for anyone who has traveled recently.
In fact, the strength in the sector adds credence to the ‘soft landing’ case as it’s hard to imagine a brutal recession if one part of the economy is booming.
Not to mention that there is more potential for growth as the sector remains about a million jobs short of pre-pandemic levels.
Summary
The stock market (SPY) is at an interesting inflection point. This is not a time to take big swings.
Instead, we will ride the rally if it keeps going higher but are prepared to lighten up if we break our pattern of higher highs and higher lows.
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SPY shares . Year-to-date, SPY has declined -9.24%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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