We all know the famed investment theme of “Sell in May and Go Away”.
That comes from over 100 years of data where most stock market profits unfolded October through April and that May through September timeframe is quite lackluster. Well, it seems like May came a month early this year as stocks sold off from recent highs in April with no sign they are ready to reclaim those previous heights any time soon.
The clues from the May 1st Fed meeting have quite a bit to do with what comes next. So, let’s recount what Powell shared at the press conference and what that means for our stock market outlook and trading plan.
Market Commentary
We all know that inflation and the Fed rate cut decision are at the very heart of the investment discussion at this time. That is why its good to review what Powell shared at his May 1st press conference to prepare for what comes next.
The biggest surprise was that the Fed is will start curtailing their Quantitative Tightening (QT) efforts in selling fewer bonds from their ENORMOUS balance sheet. That is not as exciting as the lowering of rates, but many experts see this as a 2 step dance with the lowering of QT as the first step. So, this does pave the way for the next step...that being the eventual cutting of rates.
On that front, the message was clear. Inflation is still too high and they will be very patient in waiting for undeniable proof that is on a glidepath towards their 2% target before making the first cut. And thus, the Fed is committed to keeping rates elevated to get inflation down to size.
Another sign of good news is that they are not really considering the raising of rates. They still see current rates as restrictive and thus remaining at this level for longer is much more likely than them raising rates.
The sum total of these statements was still quite hawkish. However, it was not really surprising given the facts in hand. In many ways, investors were prepared for even more hawkish news.
Net-net investors saw it as a slight positive with bonds rates dropping and stock prices bouncing higher during the press conference. Yet by the end of the Wednesday session a lot of gains were given back with it being a fairly neutral response. Gladly Thursday was a very positive session.
The bond market sees slightly better odds of a rate cut starting at the September 18th meeting with a 60% probability. Again, this is a very fluid concept with traders continually not appreciating just how patient the Fed is prepared to be. Whereas traders have the patience of a toddler on a sugar high.
From here we need to keep aware of some key inflation signals later in May starting with the 5/3 Government Employment Situation report where they will also share news on Wage Inflation which has been far too sticky.
Don’t focus on the year over year reading takes into account far too much historical data. The more valuable data comes from the month over month read which gives a sense of whether wage inflation is slowing towards the preferred 2% rate.
After that we get the twin inflation reports of PPI on 5/14 followed by CPI on 5/15.
Price Action & Trading Plan
Given the above, I continue to not see much of a case for serious stock upside until the certainty of a Fed rate cut is greatly increased. That points to a trading range or more market downside as the more likely outcome in the months ahead.
Moving Averages: 50 Day (yellow) @ 5,129 > 100 Day (orange) @ 4,979 > 200 Day (red) @ 4,701
5,000 for the S&P 500 (SPY) looks like pretty solid support especially as the 100 day moving average slides ever closer to that level.
On the other hand, any bad news on inflation, earnings, banks, middle east, or (fill in the blank) could easily have us breaking below to test the 200 day moving average. I suspect any such move would be fairly short lived as I don’t see anything pushing us towards recession at this time...and thus no reason to truly be bearish either.
Plain and simple, the high of 5,265 was built on too much optimism of rate cuts soon being in hand to bolster the economy > earnings growth > stock prices. But that possibility still exists once inflation is under wraps. So, there is not much of a need for stocks to press too low, for too long.
Instead, we are just sitting at a red light with full knowledge it will turn green quite soon. And thus, no reason to turn off the car. Thus, we are best served idling at the light and prepared to punch the gas once the signal is in place.
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SPY shares were trading at $509.21 per share on Friday morning, up $4.18 (+0.83%). Year-to-date, SPY has gained 7.46%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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