The S&P 500 (SPY) keeps making record highs...but there are cracks under the surface that are a bit more ominous. For example the fact that the small caps in the Russell 2000 are actually in negative territory on the year. That is NOT a sign of a healthy bully market. Steve Reitmeister shares his views on why this is...and what comes next including a preview of his top stock picks. Read on below for the full story...

Last week I showed a series of performance charts that called into question...Is This REALLY A Bull Market?

That’s because we see the mega cap dominated S&P 500 (SPY) pulling ahead while most other indices are lagging far behind. Some even in the red like the Russell 2000.

Monday was another prime example of this as the Nasdaq soared helping the S&P 500 too.  But other indices like Dow, Mid Caps and Small Caps all suffering losses. This sets up for a curious next step for the stock market.

We will review the realm of possibilities in this week’s Reitmeister Total Return commentary.

Market Commentary

We were supposed to get 3 rate cuts this year which did have the broad market on the upswing earlier in 2024. Then coming into April we saw the economy was too hot...and inflation not coming down fast enough.

This made it clear that the Fed would wait longer to make the first cut...and that perhaps stocks had gotten ahead of themselves. This led to a logical and healthy pullback for the market in April.

Since then mega caps have plowed ahead and pretty much everyone else has been dealt a losing hand.

Flash forward to 6/12 Fed announcement. They now predict only 1 rate cut this year with 4 Fed officials predicting 0 cuts. And from that moment we have gotten more of the same with S&P 500 making new highs and most other groups seeing more losses.

Not helping matters is that since then we have gotten more economic data that shows the economy is too hot...which is obviously not good for inflationary pressure and only further delays likely rate cuts.

A clear reminder of that was served up Friday in the form of the hotter than expected PMI Flash Report coming in well above forecast at 54.6. This is the strongest reading since 2022 as manufacturing is finally on the rise.

Sometimes it’s easy to get lost in the myriad of economic data where things can often cancel each other out. That’s why it’s good to boil things down to the one all encompassing metric if possible. On that front, GDP is the most complete view of the economy.

The current GDPNow estimate for Q3 stands at +3.0% with two thirds of the data accounted for in the model. So even if things soften with the next month of info we are still easily looking at a GDP reading north of 2%.

That is a pace that likely has a bit too much inflationary pressure packed in. No doubt Fed policies were crafted to get the economy down to 0 to 1% (soft landing) thus avoiding recession while at the same time getting inflation ever closer to the 2% target.

What happens next for stocks will have a lot to do with the next round of economic reports. The more it spells inflation...the longer we will wait for rate cuts...the more likely we will see another round of profit taking for stocks as we did in April.

Nothing nefarious...but perhaps a test of the 100 day moving average like we endured in April.

Moving Averages: 50 Day (yellow) @ 5,244 > 100 Day (orange) @ 5,178 > 200 Day (red) @ 4,851

On top of that we have the Presidential Election coming in November. The past 3 election cycles have seen modest pullbacks starting in the summer that all led to impressive rallies once the election was finalized.

This action fits under the classic saying that “the market hates uncertainty”.

Meaning that the uncertainty of election results > pullback.

Whereas the election being settled = certainty = time to rally once again.

What does that mean for investing at this time?

Yes, one could look at the details above and determine that downside risk is perhaps greater than upside potential. However, that would not be the case if economic and inflation data better than expected.

Plus, investors love breaking patterns. Especially when the losses before election seem so unnecessary given that they make way for subsequent gains. So why go down in the first place???

Right now I plan on remaining 100% invested. The key ingredient being an ample allocation to more conservative/defensive elements that would hold up better on any pullback or correction.

IF the economic data remains too hot and bond rates float back up...then I will consider taking some of the more aggressive chips off the table as they would suffer the most on any subsequent downturn. But likely still at least 75-80% long the market in total.

The key point to remember is that we are in a bull market. When that is the case then betting on downside is always a risky proposition as the market can charge ahead at any time for just about any reason.

So we want to keep a bullish posture in place by remaining mostly or fully invested. The key again is a healthy dose of defensive stocks.

In fact, many of our recent outperformers are in that space which has helped our portfolio produce impressive gains on the year. More on that in the next section...

What To Do Next?

Discover my current portfolio of 11 stocks packed to the brim with the outperforming benefits found in our exclusive POWR Ratings model. (Nearly 4X better than the S&P 500 going back to 1999)

Plus 2 specialty ETFs that are benefiting from some of the hottest investment trends.

These hand selected picks are all based on my 44 years of investing experience seeing bull markets...bear markets...and everything between.

If you are curious to learn more, and want to see these lucky 13 trades, then please click the link below to get started now.

Steve Reitmeister’s Trading Plan & Top Picks >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return

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SPY shares were unchanged in after-hours trading Tuesday. Year-to-date, SPY has gained 14.98%, versus a % rise in the benchmark S&P 500 index during the same period.

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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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