Fall Rally Ahead? Here's Why the Odds Point in that Direction

As I write this column, the S&P 500, Nasdaq, and Dow are all down more than 1%.

The latest batch of US retail sales data came in disappointingly low. Fears of the COVID Delta variant remain front-and-center. The video of Afghanis flooding the tarmac at the Kabul airport only adds to the dismal picture.

But in 30 years of investing, I've learned a few things...

1. It's never as bad as it seems.
2. When it seems bad, that's a good time to start getting a little more enthusiastic about the stock market because stock prices have been knocked down to more valuable levels.
3. Whatever it is that the folks on CNBC are suddenly worried about, chances are there's something else - something that could be a more positive force on the market - that they either don't know about, or don't want to talk about because it doesn't fit that day's narrative.

Keep reading - or watch the video below - because there's one such very "positive force" I want to tell you about today.

Three Dimensional Stock Picking

The stock market (and stock-picking) is a lot like a game of three-dimensional chess.

I'm a fan of the old original Star Trek program, with Captain Kirk, Mr. Spock and the rest of the original cast.

One thing I've always been fascinated by is the concept of "three dimensional chess" as the characters on Star Trek sometimes played on the Enterprise.

According to Wikipedia, the concept of three-dimensional chess has been around since at least 1851.

Its German inventor called it kubikschach or "cube chess" (and played on 8 boards, not 3).  A later 1907 version was dubbed raumschach or "space chess" (an ironic name, considering the game's adaptation in Star Trek 60 years later).

Full disclosure: I'm a terrible chess player. A little too left-brained I guess.

But I love the idea of three-dimensional chess.

From my perspective as an investor and speculator,  it's a great way to ponder the always-shifting, uncertain and risky process of picking stocks, and judging the broad moves of the stock market.

Think about it.

There are so many different concepts and priorities we have to keep in mind, all at the same time. Economic factors like inflation, interest rates, wars - and over the past 18 months, the pandemic. Then there's the challenge of measuring the profitability, competitiveness, and overall value of the stocks we want to own.

And there's a third element...

"Consumer sentiment" - how we feel about the economy and our own relative economic security.

When we feel good about our future prospects, we spend more. When we feel uncertain or fearful, we generally spend less.

The University of Michigan has been keeping a regular monthly survey of consumer sentiment since the 1940s.  

As investors, this is very valuable information.

See, the ups and downs of consumer sentiment are typically reflected - with a slight lag - in the ups and downs of the stock market.

Here's my point...

Odds Say "Rally Ahead"

Thanks to the buildup of worries out there, the University of Michigan's consumer sentiment index fell from 81.2 in July to a recent 70.2.

That number happens to be the index's lowest level since December 2011, and even worse than the opening days of the COVID-19 pandemic early last year.

So people don't feel very good right now.

When we see consumer sentiment plummeting, as it has in the last few months - that's an ideal time to become more interested in buying stocks - to start shopping for stocks, so to speak.

There are no guarantees that consumer sentiment can't go from bad to worse, of course, with the stock market following in the same direction.

We're talking probabilities here.

But when consumer sentiment falls sharply in a short period of time, chances are people are having a knee-jerk emotional reaction - and we're likely to see an equally sharp reaction sooner or later in the opposite direction, higher.

Don't believe me?

Marketwatch's columnist Mark Hulbert wrote a fascinating column in the last few days.

It documents the movements of the S&P 500 over 1-month and 6-month periods (the bars in the chart below) based on the ups and downs in consumer sentiment (highlighted in yellow).

To me, the most important part of the chart is on the far left.

Whenever consumer sentiment drops by at least 10 points, the statistics say the S&P 500 tends to rise around 3.5% over the subsequent quarter, and by 7.5% over the next 6 months.

If that's not a reason to overlook the current fears and start going shopping for stocks, I don't know what is.

In my premium goodBUYs portfolio, we have one stock - Moderna (MRNA) - that's already up nearly 200% since March. I think it has still higher to go once we get past this current stock market malaise.

But I also have numerous other stocks, in areas like robotics, cannabis sales, drone detection, next-generation chip technology, and what I call "police technology" - that I think are all destined to be big winners.

The time to go shopping for them is now, while prices are low and investors' attention is focused elsewhere

Best of goodBUYs,

Jeff