4 min read

What Happens After Labor Day?

Polishing up my crystal ball a little here... an orderly selloff would take some froth off the market - and set up a potential huge fall rally in smallcap stocks into 2022.
What Happens After Labor Day?

On Friday I was driving down what I consider one of the prettiest sections of developed Florida beachfront - what we call locally the "Hillsboro Mile."

Basically, it's a narrow 2-lane road with tree-shrouded oceanfront mansions on one side, and the Intracoastal Waterway with a string of floating megayachts, on the other.

And all along, lots of properties fringed with small American flags on the roadside (as folks do for Memorial Day, MLK Day, Veterans Day and July 4 as well).

Later, I decided to stop off and have my stock-picking partner Lexie pose for a shot, "tongue out" (it was a little hot before we scampered back into the car's A/C).

Hope you're enjoying the last of our 3-day holiday weekend.

So the big question post-Labor Day is what comes next?

Watch the video or keep reading below!

As always, I try to let the trading action of my individual stocks be my ultimate guide.

But this time a year ago, we concluded a nice August rally - and the stock market promptly sank 10% over the next 3 weeks or so.

With lightning having struck twice already (with 2 great August rallies a year apart) - could lightning strike a third time with a repeat-September correction as well?

Yes, of course.

I'm actually hoping the market cools off a little in coming weeks.

Polishing up my crystal ball a little here... an orderly selloff would take some froth off the market.

It would also set up a potential "lightning strike #4" with a huge fall rally in smallcap stocks into 2022.

As I've pointed out in numerous updates these past months, the Russell 2000 has been going sideways while the S&P 500 and Nasdaq 100 keep carving out new all-time highs.

So if we're in a supposedly transitory period of higher inflation, smallcap stocks (which typically outperform in an inflationary setting) are due to have another primetime moment with investors.

The Bear & Bull Cases

If you lean bearish, of course, this is all wishful thinking.

The market is heavily extended and - whether you slice up your valuation metrics by profits per share, by sales per share, or book value - heavily overvalued.

There's also no small number of things to worry about, too - COVID-19, a potential change in Fed policy, economic policy changes in China, indebted consumers, alongside an overvalued market.

But if you lean bullish, all you need to remember is that many of these worries and  overvaluation metrics have been this way for many quarters.

For instance, the S&P 500 has now gone well over 200 sessions in a row without a correction of even 5%. Most "selloffs" have barely lasted a few days before buyers swarm back into the market.

And that's in an environment with lots of knocks against it - primarily the surge in Delta variant COVID-19 cases, slowing economic growth.

But here in Florida, the Delta variant situation appears to be peaking...


I'm no contagious disease expert, so I'm speaking out of turn. But I would hope that if it's peaking here, perhaps it's going to peak soon in other hotspot states as well.

If that becomes the case, then there's an equal chance or better that the broader market - anticipating a resurgence in the economy - keeps plowing along at these levels without a big correction.

With all that in mind...

Party Like Its 1999?

Just because the stock market appears extended - does not mean a thing (as I need to remind myself at occasional nervous moments as well).

The 1999 stock market was one such period where lots of folks thought the market was incredibly extended by all measures through September and October - investors lingered on the sidelines, afraid to commit, but afraid to walk away too.

Everyone was awaiting that "perfect" moment to finally plunge back into the market.

When it came, I remember (as a market newbie and bearish-leaning investor of the time) being flabbergasted that the market could keep barreling higher and higher (and that was with the Federal Reserve actually raising interest rates).

Yes, the tech bubble came apart the following March, to much pain and consternation, and an eventual bear market that lasted into 2003.

Such a fate could await us - in coming weeks, for all we know, or at a more distant point in the future.

We always need to keep in mind the risks, just like there's always some chance that our own market could fall apart for reasons that are only apparent in the rear-view mirror.

But if you were stubbornly bearish in 1999, it was a long 5 months.

Meanwhile bullish investors - or at least folks willing to keep an open mind about these things - watched the Nasdaq nearly double in value.

And that's all I'm saying here - I'm keeping an open mind, positioned for more upside gains if the market gives us an additional opportunity during this extraordinary 2021.

Best of goodBUYs,

Jeff Yastine

Publisher, goodBUYreport

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