Home on the Trading Range The nearly 20% bull run for the S&P 500 (SPY) from the March lows is over. Now it's time to rest up in a trading range for the next run...

The S&P 500's (SPY) nearly 20% bullish run from March lows has ended. It's now time to relax in a trading band and prepare for the next rally. This is the normal course of events. Relax after a long run...and store the energy required for the next sprint. It's best to use these range-bound periods for buying stocks that have great upside potential. In this week's Reitmeister Total Return Commentary, let's discuss how we'll do it.

After a seemingly non-stop rally of 5 months, we finally saw the stock markets take a step down. The Fitch downgrade of US debt is cited by many investment commentators as the main cause. If we're being honest, ....this self-off was overdue. Fitch's announcement was a convenient way to sell for a little while.

The Friday session was interesting and worth noting. The Government Employment Report was a Goldilocks-like announcement. The S&P 500 rose nearly 1% in early trading because the temperature was just right.

As the day went on, those gains were wiped off the board, resulting in a session of -0.53%. It was even more interesting to see the S&P 500 close below 4,500, and we are now likely on our way to 4,400. (More on this in the Price Action section further below.)

Although we do not like to see red on our screens, this is good for us. Investors took advantage of intraday rallies to make more money.

Investors have been buying dips for several months now, and it has worked out well. They didn't realize that Moody's had downgraded their ratings for a number of small and mid-sized banks on Monday. The Risk Off mood from last week was revived, with investors pushing the sell button more aggressively on Tuesday.

The fear/greed swing is classic. The rally to 4,600 was a bit overdone. The conditions simply were not pristine enough to continue rising. Investors became vulnerable to bad news, and Fitch and Moody's reminded them that the market could be ahead of itself.

Earnings are another reminder. We are now in the home stretch of the Q2 earnings season and we have seen that future earnings estimates have been reduced for the next few quarterly periods. Addition of these 3 quarters indicates virtually no growth year-over-year.

It is not good fuel for a bull rally to have a weak outlook on earnings.

This is especially true when S&P 500 already has a PE of around 20. This is not necessarily an overpriced stock...but rather fully priced. To be able to expect a higher price without inflating the PE, you will need to have better future earnings growth prospects.

It is an indirect way to say that it is time to stop the rally and enter a period of consolidation to absorb recent gains. Be more selective in selecting the stocks you want to advance.

Why do you still believe in a long-term bull rally?

The Fed has been giving more and more hints that it is a "dovish" Fed. Harken, the Philly Fed's president, stated in a speech that no more rate hikes were likely needed. They need to wait for the high rates to take hold and lower inflation. Start thinking about lower interest rates.

The future rate reductions are a tailwind for the economy, which increases the chances of better growth (which is what is needed to drive prices higher). It is good to know that this is coming.

There are also more people who feel optimistic about the future. This is the chart of the NFIB Small Business Optimism Reading on Tuesday morning, 91.9.

This is the third month in a row that the reading has improved and it's the highest since quite some time. This optimism is a sign of improving growth trends.

Consider this. You first feel positive about something, then you act upon that feeling. Sentiment surveys are leading indicators for future economic activity.

Overall, there are more reasons to believe a recession will not occur during this cycle of rate increases. If this is the case, then earnings should improve from here on... which will fuel share price appreciation.

Price Action & Trading Plan

This is the latest S&P 500 chart.

Moving Averages: 50 Day, 100 Day and 200 Day

Right now, 4,600 is forming a strong resistance level and trying to find support at the bottom for a possible trading range. I think that the 50-day moving average at 4,420 is as low as stocks can go.

This is a range of trading where we will likely be swimming around for several months until the holiday rallies in November/December kick-in giving us a shot at the all time high.

This is a great setup for a stock-pickers market, which is what I like. The market may be lukewarm, but those who have a good stock-picking advantage can still make money.

In our case, the POWR Ratings is a big advantage in our corner to find stock picking profits in any market environment...especially an environment where the leaders are overripe and investors will rotate to more attractive, underpriced plays.

What Next?

Discover my current 5 stock portfolio, which is packed with all the benefits of our POWR ratings model.

Plus, I've added four ETFs in sectors that will outpace markets in the coming weeks and months.

My 43 years of experience in investing has seen bull markets, bear markets and everything in between.

Click the link below if you want to know more and see these nine hand-selected trades.

Reitmeister Total return Editor and CEO of StockNews.com

In after-hours trades on Tuesday, SPY shares dropped $0.10 (-0.02%). SPY shares have gained 18.23% year-to-date compared to a % increase in the benchmark S&P 500 Index during the same time period.

Steve Reitmeister

Steve is known as Reity to StockNews' audience. He is not only the CEO, but also shares 40 years of experience with the Reitmeister Portfolio. Reity's biography is available, as are links to some of his recent articles and stock selections.