As we anticipated last week, the stock market is pulling back after two consecutive months
of gains. I expect this will continue until the broad indices find the first level of support at
their 50-day simple moving average. For those of you tracking the market-cap weighted S&P
500 (SPY), that represents a price of 442.35. This would equate to a pullback of around 4%
from the recent high made at the end of July. The other major indices (QQQ and DIA) are in
similar positions. This would be a typical pullback within a larger uptrend and is healthy in
my opinion. If the 50-day simple moving average fails to hold, look for the next level of
support for SPY in the 420-430 range. While not any fun, this would still only be a 7% drop
from overbought conditions, and well within the bounds of a normal correction.
At Cabana, our safety valve remains engaged as we are still outside of drawdown targets
from all-time highs. As such, it would likely trigger before we reached the latter levels. While
we are bullish over the medium term, we will act to protect in the event volatility increases.
We got July CPI numbers yesterday and they were in line with expectations and add weight
to the argument that inflation is trending lower. This gives the Federal Reserve room to
breathe and perhaps pause or conclude their interest rate hikes at the September meeting. I
assume this would be welcome news for investors of all types, but especially bond investors.
Incredibly, bonds (AGG) are down again YTD after experiencing one of their worst years in
history in 2022. All those who assumed bonds would have a nice rebound this year remain
mired in a world of pain. We have felt it as well. Bonds of all types make up part of our all-
asset portfolios and when they continue to drop, it hurts. The silver lining around it is that
we are likely at the end of the process and these assets are yielding more than we have seen
in decades. “Every doggie has its day”, and they will again get theirs. I just hope it is sooner
rather than later.
At Cabana, we remain in our Transitional Bullish Scene.
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