Market Update: Does Q2 End with a Whimper or a Bang?

If you find yourself confused - or overwhelmed by too many opinions about the stock market's direction - it's entirely excusable.

I find myself that that way too, quite often.

The truth is...no one has a real answer. We can dig and dig for data, and sift the opinions of the best and brightest on Wall Street and still - no one really knows.

I mean, many years ago, I would take to heart the pronouncements of Wall Street strategists who used to appear on my TV program, PBS Nightly Business Report. But if you wrote down what they said at the time, versus what actually happened 3 months or 6 months later...the conclusions hardly inspired confidence.

Sometimes they were right and sometimes they were badly wrong. Simple as that.

We can see a very good examples of this dichotomy playing out right now in the markets. Last week, the S&P 500 posted a very respectable 6% rally - and moved sharply higher at the precise moment that many (including me) thought the index was going to break down to lower levels around 3,400.

Tale of 2 Strategists

The main strategist at Morgan Stanley, a guy named Mike Wilson, expects the S&P 500 to be hobbled by aggressive interest rate hikes and a looming recession, and will finish the year right around current levels - about 3,900.

Meanwhile, at a rival firm Oppenheimer, its strategist John Stoltzfus thinks talk of a recession and an aggressive Federal Reserve is largely baked-in and overdone at this point.

Stoltzfus thinks the S&P 500 is set to rise by 40% in the next 6 months, and finish the year at 5,330!

Both are smart people. Both have made great, accurate calls about the markets. But who's right?

That's what puts that four-letter word "risk" in the stock market's vocabulary - as well as its 6-letter counterpart - "reward."

I think you know which way I'm leaning - bullish.

1. Consumer sentiment hit an all-time low of "50.0" in June. As others have noted before, when shoppers' sentiment gets that low - it tends to indicate that we're at or near a bottom in the stock market on the theory that prior negative trends are going to reverse and move in a more positive direction.
2. Oil prices have started to move lower - from $122 down to $107 a barrel in the last 12 sessions - as traders begin to bet on the possibility of a Fed-induced recession.
3. Interest rates may be topping out. The yield on the 10-Year Treasury Note ran to a high of nearly 3.5% - its highest level since 2011 - before backing off somewhat.

4. Dollar "safety" no longer needed? Perhaps overlooked by many traders is the fate of the value of the US Dollar when measured against other currencies like the yen, euro and yuan.

When times are tough and uncertain, traders buy the dollar - the global reserve currency - and sell everything else. When they sense that the worst has passed, they sell the dollar and begin buying other currencies again.

That's why I'm watching the US Dollar Index these days. As you can see on the chart below, it recently put in what could be a "double top."

So if this index begins to descend lower, it would also likely point to currency traders betting that their worst fears - a global recession - are no longer in the cards and it's time to start selling the dollar and betting on "risk" - on high growth stocks - again.

How Will We End the Second Quarter?

With that in mind, the coming week is sort of important - it marks the last week of the second quarter of 2022.

Such as it is, I see 2 possibilities.

One, we could see last week's rally continue (the green line) as traders continue to build exposure to the stock market amid a bullish-leaning presumption that recession fears are overdone.

Two, we could see a steep selloff (the red line) that makes it appear the bear market is back in play:

My point is - if we get a steep selloff - do not let it throw you.

Yes, it's possibile that I've completely under-estimated the possibility of a further market meltdown as we moved into Q3 in July.

But if it happens - an unexpected, rapid decline is part of what we ought to expect at this point. It scares yet more traders out of the market, and establishes a firm bottom for a sustained rally in the second half of the year.

As always, I'll continue to monitor the markets - and send out associated buys or sells for our goodBUYs portfolio - as warranted.

Jeff Yastine