In mid-March, the SPDR S&P 500 ETF (NYSEARCA:SPY) pulled off a massive rally. Shares of the ETF rallied 11.5% as it climbed in nine out of 11 sessions before topping out on Mar. 29. In the other two sessions during that stretch, SPY stock had one flat day and one 1.3% dip. For bulls, it was some much-needed reprieve and opportunity to lighten up on existing longs. Why? Because it left SPY stock down just 3.4% from its all-time high made in early January.
Look, I’m not a hardcore perma-bear. However, it is hard to look at the situation that investors face and feel optimistic. Granted, the long-term statistics say investors should stick with this stock. Over the last 70-ish years, the S&P 500 has rallied in four out of five years, while the average annual gain is larger than the average annual loss. For example, any given up-year during that stretch had an average gain of 17.04%. Conversely, the average annual loss is just 11.93%.
With that knowledge as a long-term investor, I think we can also look at reality and acknowledge the short-term issues at hand. SPY stock and the market as a whole can fight off a few headwinds, but multiple and significant headwinds? That is a different story. Specifically, the markets faces:
- A U.S. Federal Reserve (Fed) tightening cycle
- Poor technicals with many stocks mired in a bear market
- Raging inflation hurting the consumer
- A war in Eastern Europe
If inflation tops and there is peace in Eastern Europe, that could kickstart a nice rally in stocks. That may even be enough to fix the technicals for SPY stock and specific sectors. However, the Fed may remain a problem.
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As if raising rates multiple times is not bad enough, it plans to reduce its balance sheet. Again, I’m not into fear mongering and the SPY stock can push higher in a rising-rate environment. But with the Fed reducing its balance sheet rather than adding to it, it puts stocks in a tough position. It also puts many investors in an unfamiliar position.
Then you throw in the other headwinds, it is clear to see why one may be cautious on the SPY stock if it is at or near the March highs.
On the chart above, bulls will look at the minor pullback and say it is simply a dip after the rally. Bears will look at the rally as a dead cat bounce and one that should be sold into rather than chased. At this juncture, it is impossible to say who is right. However, with the current backdrop of events, I’m inclined to lean toward the “risk-off” group rather than the “risk-on” one.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
