Date: May 25, 2022

Like a Broken Record – Volatility to Remain High

Greetings from Metro North, my first train ride to New York City since February 2020. Trains are still crowded. Masks are mandatory although 25-33% of the riders are not wearing them. And my parking lot in Milford CT is now a condo complex, something that would have been helpful to know before I arrived. Given how bad traffic has been to NYC, I think I am going to stick with the train for now. I am hoping to get my stitches out from my ankle clean up two weeks ago and be cleared for full activities. Then it’s off to Fox Business for a visit with my friend, Charles Payne, at 2:45pm, just in time for the release of minutes from the Fed.

A fair amount of folks have pushed back on my conclusions that a low is in place for stocks. That’s okay. I love constructive criticism and spirited discussion. The chorus is loud and clear about impending recession and no bottom for stocks until the Fed conquers inflation. I do not agree. Some have argued that while no recession is coming, now is not the time to buy stocks. That may be the single most absurd analysis I have heard in decades. If recession is not coming and the major stock market indices are down 20-30% when is a better time to buy?

Looking at the stock market today, the S&P 500 put in a low on May 12th, had a strong bounce and one more flush below those levels on May 20th. The NASDAQ 100 had similar behavior. The S&P 400 and Russell 2000 did make new lows on May 20th which warned of an impending turn. On the sector side, semis, software, healthcare, biotech, materials, energy, REITs and utilities also did not make new lows.

Almost every sentiment gauge I follow has been at historic extremes. Market underpinnings like the number of stocks making new lows and the percentage of stocks in a bear market have been at washed out levels. The ingredients for a strong bounce are certainly present, even if this was 2008, which it’s not. Whether the final bottom is in or not remains irrelevant. The stock market is supposed to bounce 7-15% into summer. The more investors talk about selling the rally or just another failing bear market rally, the longer the rally should live on. If investors quickly embrace it then the rally should be shorter-lived.

On Monday we bought PCY, EMB, IWM and levered inverse S&P 500. On Tuesday we bought EWZ and more ECH. We sold levered inverse S&P 500.


Paul Schatz, President, Heritage Capital