I’m going to keep this week’s Total Wealth short, as in really short; not because you’re going to get a long report next week on upcoming earnings, rather, it’s because I have a “long” bet for you to make on the back half of this year that you might want to set up right away.
It’s about the first half of 2022.
Every financial news outlet and platform, and most Main Street media outlets made a big deal about the S&P 500 closing the first half of 2022 down 21%. It was in a sense “historical.”
The benchmark of what institutions consider to be “the stock market” posted its worst performance over the first half of the year since – wait for it – 1970! That’s a long time ago, which makes the S&P 500’s drop sound extraordinary, frightening, and like the beginning of the end of the market…
Or something like that.
Seeing the market down 21% was a bit disconcerting for me, considering the bulk of the slide came in the second quarter. The S&P 500 was down only 5.6% in the first quarter. But, not being one to be stirred by hyperbole, I was curious, about what happened in the second half of 1970.
Of course, since hyperbole sells, I couldn’t find a single article or show with experts or analysts or money managers (or even talking heads) who said anything about what happened in the back half of 1970.
So, I did some homework, which I’m prone to do a lot of.
And surprisingly I found that the S&P 500 jumped 35% higher in the second half of 1970.
That got me thinking…
Since none of the articles or news shows I searched said anything about the market falling that much in the first half of a year being a record, only the worst first half going back to 1970, I wondered what other years saw tough sledding for the market in the first half, sliding something like the market just did, and what happened to those markets in the back halves of those years?
As it turns out, 1962 witnessed a sliding market in the first half, just like 1970 and 2022. Before that, 1940 had a similar ugly first half; so did 1939 before that, and 1932 before that.
Those four years (1932, 1939, 1940, and 1962) saw the market slide on average 15%.
Now, guess what the market’s performance averaged in the second halves of those years?
Believe it, because it’s true, the average gain in the back half of those years was 24%.
That’s what you find out when you do a little homework.
Now, here’s how to use it.
Since there are very few positive narratives out there, and stocks are cheap by recent standards – coming off their early 2022 all-time highs – a rally could be triggered at any time.
Here’s how we could get a back-half 2022 rally.
The backdrop for a rally is compelling. There’s an overabundance of negativity, and markets are very oversold. Those are contrarian buy signals. There’s a massive amount of sidelined money; by my calculations more, than $4 trillion.
That’s a lot of dry powder. There’s been a lot of shorting as negative sentiment spreads. That’s more dry powder if shorts are forced to cover unexpected good news on inflation or the economy. And the VIX getting to 36 has been a solid short-term buy signal. If the VIX gets to 44 (3 standard deviations from its LT mean) on a raft of panic selling, a lot of institutions will bottom fish against a VIX tide that high.
Earnings could come in higher than optimistic analysts are projecting. We’d rally on that.
In order to play a back-half rally, on a very sound risk-reward basis, I just had my subscribers buy an out of the money call spread on a leveraged ETF that tracks the market. If the market goes up only 10% in the second half, the underlying leveraged ETF we bought a call spread on would go up twice as much or 20%.
If the market, as measured by the S&P 500, goes up by 24%, as it averaged over those early four years, or 35% as it did in 1970, our underlying market benchmark with leverage would be up 48% to maybe 70%.
How’s that for a back-half 2022 “long” play.
You can do the same. I would.
Cheers,
— Shah
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Source: Total Wealth