Your Mid-Year Game Plan: What’s Happening Now And What to Expect Next

By TradeSmith Research Team

[Editor’s Note: TradeSmith CEO Keith Kaplan recently asked me to sit down for a midyear check-in: To see what I’m looking for in stocks, and to get some thoughts on what investors should be doing right now.

Keith is a friend – and my boss! – so I was on my best behavior. Seriously, though, our talk led to some useful insights about where we are, where we’re going, and how to make the most of it.

I wanted to be sure that you and your fellow Power Trends readers were clued in on what we talked about. With that said, I’ll turn it over to Keith …]

Keith Kaplan (KK): Jason, thanks for talking with me. We came into the year facing the headwinds of inflation, the Fed hiking interest rates, decelerating earnings, recession worries, and more. We’ve mixed in such “new” ingredients as bank-deposit flight, a possible China slowdown, and a debt-ceiling deal that keeps kicking problems further down the road. And those are just some of the headlining factors.

Jason Bodner (JB): All correct, Keith. The catalysts for a lot of uncertainty.

KK: When you look across that landscape… I have to ask: What does this mean for stocks? Let’s start with your outlook: What’s your outlook for stocks in the next one to three months?

JB: It’s a good question, Keith. And one worth asking. Especially since it seems like, these days, the market is full of people with very cloudy crystal balls.

I’m not a big “outlook” guy myself. But when I am asked to make predictions, I always use historical data and precedent to talk about what’s possible. So, with that disclaimer out of the way, let me get back to your question.

The good news is that you asked this question at a great time. That’s because seasonality is a real phenomenon in the stock market. Turns out that the adage “sell in May and go away” has some truth to it after all.

The chart below shows that (historically speaking) the May-through-September stretch can be the weakest:

KK: And do you expect that run to continue this year?

JB: I do, Keith. I envision lower liquidity, higher volatility, and choppy returns for at least a little bit longer.

KK: Okay, that covers the near-term outlook. Let’s talk about the intermediate.

JB: History is on our side for a strong back part of this year and the beginning of next year.

And then you’ve got the economy growing ever closer to resolving inflation and an eventual end to interest-rate uncertainty – the Fed left rates unchanged this past week for the first time in over a year. All in all, I expect we’ll have more fuel for a “Big Lift” stock-market rally in the back half of the year and the beginning of next year.

KK: That’s great Jason. So… then… what’s the long-term outlook?

JB: Long-term outlook? This is an easy one, Keith.

All you have to do is to look at a 100-year chart of stocks to know that it pays to be a long-term investor in stocks.

I can’t think of any other investments that perform and grow the way stocks can.

Not a one.

If you need a yardstick for comparison for long-term investing, just look at Warren Buffett and how he massively grew his assets over many decades.

KK: You’re a big believer in having a long-term focus with stocks…

JB: I am, Keith. I really am.

That said, not everybody has a multi-decade horizon. That’s not even the smartest approach a lot of times.

And that’s why it’s also great to have shorter-term investing strategies.

So, in my Quantum Edge services, we aim to stack short-term wins repeatedly – an approach that will let investors create great wealth over time.

KK: One of the most compelling factors you’ve spoken about recently is the huge amount of cash – a record $5.3 trillion – currently sitting on the sidelines… in money-market funds. That’s a historic extreme. Is that also an “inflection point” for stocks? And if that’s the case, what’s the trigger that makes that happen?

JB: That is a terrific question.

I was recently looking at the market’s low liquidity levels. There’s just hasn’t been a ton of volume being traded, which helps open the door for some of that volatility we’ve experienced.

What could explain that?

Well, one answer is that a lot of cash left the market during last year’s big slide in stocks – and just hasn’t come back yet.

That makes sense, fundamentally, since uncertainty is “Enemy No. 1” for investors.

KK: And we all know there’s a ton of uncertainty right now.

JB: That’s right. And that’s why we’ve got that pile of cash… that $5.3 trillion… sitting out there.

I’ve been telling my Quantum Edge subscribers that, given the data and the trends, the biggest risk facing investors now is staying in cash and missing out on future profits. I mean, the S&P 500 recently entered a new Bull Market, and a lot of folks haven’t participated.

Now, here’s where it gets interesting. To your point: What could trigger an inflow into stocks of all that money?

I think it’s what we just discussed: a little less uncertainty.

The Fed is clearly winding down rate hikes to combat inflation. As inflation improves and rates stabilize, the stomach-churning anxiety over what the Fed will do next goes away.

Also, to note, the “earnings apocalypse” so many pundits called for in the recent reporting season just never materialized.

Just the opposite, in fact:

First-quarter earnings season just wrapped – with the data showing 78% of companies beat earnings expectations.

KK: Hardly an earnings apocalypse.

JB: Hardly is right. While companies have been guiding lower to temper expectations, a company only has to beat the estimates that they set to gain a rosier outlook the next time they report earnings.

Look at what happened with Nvidia Corp. (NVDA).

It beat forecasts and the CEO offered impressive guidance – and the stock exploded higher. More moves like that may start to cause fear of missing out (FOMO) among more retail investors.

And, let me tell you, FOMO is downright contagious.

Get a few of these going and the dam will break… and cash will flood into stocks in a way I suspect will catch many off-guard. Which, in turn, will ignite more buying.

And that’s great for those already invested in the highest-quality stocks.

KK: Let’s stay with that thought… with that topic – risk. What are the risks we face as investors right now? What are the key “don’t do this” mistakes to avoid?

JB: Again, Keith, I think the biggest risk – mistake – is for an investor to be so worried about losing money that he or she sits the market out.

I understand the sentiment. I truly do. Especially when markets are under pressure as they are right now.

But here’s what you really need to consider: If you look at the long-term, 100-year trend of stocks, you see that the best times to be involved are usually when it feels the worst to be invested.

KK: What you’re saying, Jason, is that, over the long haul, the returns are best when it feels the worst?

JB: That’s it, Keith. Waiting it out feels good – and, admittedly, lets you sleep at night – but also ensures that you miss out when the market finally turns.

That’s the first mistake.

The second mistake, I believe, is holding forever. The stock market today is simply not the same as when your grandfather or dad were investing. Of course, there potentially are certain stocks to buy and hold forever.

But with the advent of high-frequency trading and a lot of short-term gyrations, it seems prudent to be more flexible with your time horizon. My whole approach is based on identifying which stocks will climb higher by using the trading of Big Money investors as our clues. I mentioned “stacking wins” earlier, and that’s exactly the strategy in my Quantum Edge services.

Our system identifies stocks that have a high probability of beating the broader market. We buy those, and we don’t become emotionally attached. We add risk parameters that are designed to protect profits – by raising them as the stock moves higher – and mitigate losses.

When we sell a stock, we hop aboard another one – and continue to stack our gains.

This method – versus the “buy-and-hold-with-a-dash-of-prayer” approach – lets you avoid mistakes while staying active and profitable during tough times for the market.

Editor’s Note: In the second part of our talk on Monday, Keith and I delve into how to find the best stocks in the market using the Quantum Edge system, which accesses real-time information on what the Big Money pros are buying and selling while also eliminating marginal companies. That way, we focus on stocks with the right combination of financial muscle and momentum to succeed.

Click here if you would like to learn more about how it all works, and I’ll send you Part 2 of our conversation on Monday.

Enjoy the weekend!