At the outset of every month, we take a top-down look at the US equity markets and ask ourselves: Do we want to own more stocks or less? Should we be erring toward buying or selling?

That question sets the stage for everything else we’re doing. If our big picture view says that stocks are trending higher, we’re going to be focusing our attention on favorable setups in the sectors that are most apt to lead us higher. We won’t waste time looking for short ideas – those are less likely to work when markets are trending higher. We still monitor the risks and conditions that would invalidate our thesis, but in clear uptrends, the market is innocent until proven guilty. One or two bearish signals can’t keep us on the sidelines.

Similarly, when stocks are trending down, we aren’t looking to buy every upside breakout we see. We can look for those short opportunities instead, or look for setups in other asset classes.

So which is it today? Are we looking for stocks to buy or stocks to sell?

Storm clouds are brewing.

Interest rates are on the rise, and the US Dollar is in the midst of an historic move higher. Both were headwinds in 2022, and their resurgence has had the same effect this year. The S&P 500 is off 7% from its July peak.

Despite advocating for a more cautious approach to equities in our last two monthly outlooks, it’s been our opinion that the recent selloff was merely a pullback within a longer-term uptrend. After all, pullbacks of 5-10% are quite common within bull markets, and the months of August and September are typically some of the weakest. Now we’re forced to question whether we’ve been too sanguine about the outlook.

Is this the start of a much bigger decline?

At the outset of every month, we take a top-down look at the US equity markets and ask ourselves: Do we want to own more stocks or less? Should we be erring toward buying or selling?

That question sets the stage for everything else we’re doing. If our big picture view says that stocks are trending higher, we’re going to be focusing our attention on favorable setups in the sectors that are most apt to lead us higher. We won’t waste time looking for short ideas – those are less likely to work when markets are trending higher. We still monitor the risks and conditions that would invalidate our thesis, but in clear uptrends, the market is innocent until proven guilty. One or two bearish signals can’t keep us on the sidelines.

Similarly, when stocks are trending down, we aren’t looking to buy every upside breakout we see. We can look for those short opportunities instead, or look for setups in other asset classes.

We’ve been decidedly bullish on stocks since May, when the S&P 500 broke out above a key resistance level near 4150. With prices setting higher highs, higher lows, and above a rising long-term moving average, how could we not be?

That’s still the case today – equity prices are undeniably in an uptrend. That means we shouldn’t be spending time trying to find stocks to short. Rather we should be asking ourselves how bullish we should be? How aggressively should we be looking for stocks to buy?