I am continuing to urge caution and vigilance for equity investors. My research is strongly suggesting that there still is downside ahead, and evidence is slowly building for having to introduce a new downside target below my longstanding key zone of 3,500-3,600. UGH, don’t shoot the messenger as it’s the indicators in my analytical toolbox.  I am yearning to get back to the bullish views I had from 3/20 to 3/22, but my process is to follow the evidence with a discipline, and they remain pointed towards the bear. 

Generally, though, what happened earlier this week at the FOMC meeting has been consistent with my research and commentary over the past couple of months. In my opinion, whether 50 bps or 75 bps was the appropriate level to hike right now is not too relevant in the bigger picture of everything that is going on now.  On the other hand, what is pertinent is that the U.S. economic growth is clearly slowing, and that my proprietary earnings revisions work shows that estimates for corporate profits will surely be too high and need to be lowered over the coming months barring a sudden decline in energy/commodity prices.

Historically, this adjustment process takes some time to play out, in fact the analyst community appears to be sitting on their hands which is contributing to the slow-moving story thus far. Based on my database going back to 1990, I would expect the cutting cycle to take at least 1-4 months, at minimum, to reach maximum negativity.  I’m not calling for a massive 30-50% decline in corporate profit expectations, but rather lowering numbers to somewhere between 5-10% down yr/yr seems quite reasonable relative to history.  After their near-death experience during the complete shutdown of the U.S. economy that occurred during COVID, Corporate America appears to be lean and mean, but it’s nearly impossible to fight the economic gravity that a likely recession brings to even the strongest of companies.

This data that was released this week continues to support the slowdown thesis.  Industrial production, which measures output from factories, mines, and utilities, was shown to have slowed in May and was a downside surprise. Indeed, the results were a paltry .2% compared to 1.4% the previous month. So, the pace of slowing was quick and large. In my view. datapoints like these that show weakness are yet not fully priced into the equity markets or fully appreciated yet by the analyst community.   

The Energy sector had a miserable week and I wanted to make a few comments.  As a reminder, I had dialed back the full-overweight view I had on the sector to a tilt-overweight in my March sector allocation update.  My work still supports Energy, but my indicators were getting into the positive extreme area, which suggests the reward risk ratio was less favorable.  When this occurs, my process is to be mindful of one’s weightings and take some profits.  Over the next week, I will be spending time evaluating if this will be a dip to buy or should we get even smaller.

Bottom line:  Remain overall cautious as downside pressures remain.  Stay alert for our upcoming opportunity but be patient that it may take some time.  There is no need to be aggressive and chase rallies at this point.

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