Be Wary of Bullish Moves in Bearish Periods

The stock market just had its best two-day stretch in two years, but I wouldn't get too hasty calling a bottom yet.

The market bounced right after it tested and briefly broke below June's low. For now, it's stuck in a trend of establishing lower highs and lower lows.

The S&P 500 would still need to cross its 200-day moving average before it can escape its recent downtrend, but investors' responses to September's inflation data next week will be critical.

Here's a weekly chart of the S&P 500. The 200-day moving average becomes the 40-week moving average on this chart, indicated by the solid blue line:

Click here to view full-sized image.

 

You can see that the moving average is about a 10% rally from recent prices. If your trading window is very short-term, you could trade it. But I tend to think — and trade — long-term.

Optimism on a Fed Pivot Grows. Should It?

This week's rally comes after a series of developments raised investors' hopes for a sooner than expected Fed pivot.

First, the Bank of England blinked by implementing a new indefinite quantitative easing policy to save its freefalling bond prices and currency.

Collapsing bond prices risked U.K. pension fund solvency, so the new money-printing initiative kicks the can down the road at the expense of fanning inflation.

Next, the United Nations called for halting interest rate hikes in advanced economies.

The UN claims the world is "on the edge of a recession" that could still be avoidable if central banks ease their monetary policies.

Recessionary fears are on the rise, but so are consumer prices.

Inflation is the Fed's top priority currently, and I don't expect that to change as quickly as Wall Street hopes. Recent statements point to continuing rate hikes into next year as expected.

Fed Chairman Jerome Powell hasn't minced his words since his speech in August, and Fed officials echoed Powell's sentiment this week by supporting the Fed's current plan of tackling inflation at whatever cost.

Fed pivot optimism helped stock prices before, with much of the rally spanning June and July catalyzed by growing hopes of easing monetary policy.

However, the U.S. central bank poured cold water on those hopes, and with a robust U.S. job market, its priority is to curb inflation.

The Fed's rhetoric shows no hints of bending to Wall Street before inflation is in check.

Beat Volatility With Historical Outperformance

It's still too soon to tell if the market has bottomed, and I expect more volatile trading ahead.

With rapidly-changing Fed expectations dominating price action, it could help to add exposure to a basket of stocks that historically outperform over the long-term. I'm talking about dividend raisers, which are usually strong enough to continue increasing their payments to shareholders in spite of uncertain economic conditions.

One fund to explore is the Vanguard Dividend Appreciation ETF (VIG). It tracks the S&P U.S. Dividend Growers Index and holds large-cap companies that raise their dividends each year.

Three of the fund's top holdings include UnitedHealth Group (UNH), Johnson & Johnson (JNJ) and Procter & Gamble (PG).

VIG's expense ratio is 0.06%, but its dividend recently yielded 1.9% annually. It has plenty of liquidity, averaging nearly 1.5 million shares traded daily.

Looking at VIG's weekly chart, the fund decisively bounced off support when the market rallied:

Click here to view full-sized image.

 

VIG is trading well off its highs last year, which presents an opportunity to enter at a discount.

Always do your own research before buying anything, but as market conditions grow more uncertain, it helps to hold companies that historically outperform regardless of the economy's health.

My MoneyShow Presentation

Also, Oct. 11 I'll be giving an online presentation for the MoneyShow Virtual Expo. I'll talk about using dividend payers to capitalize on the hottest megatrends.

Click here to view full-sized image.

 

If you would like to tune in and join me, you can register here for FREE! Complete your no-cost registration today, and I look forward to seeing you there.

All the best,

Sean

P.S. Last week, Dr. Martin Weiss and a special guest expert who picked the last big bottom showed members how to spot the NEXT big bottom. Find out how by clicking here.

About the Editor

Widely known as the Indiana Jones of natural resources, Sean has sifted through terabytes of data and traveled tens of thousands of miles in search of companies that can make a transformative difference in the lives of investors. With his boots-on-the-ground experience, he visits mines, meets executives in person, discovers hidden opportunities and reveals pitfalls that investors should avoid.

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