If valuation matters, there is no precedent for where we find ourselves. The Wilshire 5000 to GDP Ratio, Warren Buffets favorite benchmark, exceeded 214% at last week’s peak.
At the 2000 market top, the number was about 139%. At the 2007 top, it was just above 100%. Even before the China Virus crash in March 2020, the number was 150%. When these markets corrected, the number rolled back to the 50% to 60% range.
As you know, the NYSE index erased seven years of gains almost overnight when the China Virus went mainstream a little more than a year ago. And it isn’t just the overvalued stock market, which is why this is called the “Everything Bubble.”
We all know this won’t end well. More money has gone into stocks in the last year than the last 20 years combined. We try not to think about it until there is some negative, vertical price action. Then it is like, “right, this is the stratosphere.”
Perhaps most concerning is that the market has become more a function of the Fed’s balance sheet than anything else. The correlation with the S&P 500 Index and the growth of the Fed’s balance sheet is nothing short of stunning.
Market participants look to the Fed rather than the economy, earnings, or other fundamental factors. So when the Fed talks about slowing the growth of the balance sheet by tapering their latest Quantitative Easing program, you can understand the market’s negative reaction.
Typically, the bloodbaths usually occur on the four-year cycle corrections. In our case, that would be a trough in 2024. Sometimes, we can start into such a decline a year early. Starting now would be very, very early. But we could certainly start with a trading range as the Fed tapers the balance sheet. And Chairman Powell admitting the obvious, that the recent inflation isn’t transitory, has the market anticipating a relatively fast taper.
Swing Traders
We are in the zone for a minor reversal. We are trading around the 50-day line and the channel that started from the correction about this time last year. Smart Money confidence is climbing to 80%, while fear indicators continue to rise. Both indications are positive for a short-term low.
Due to the size and velocity of the bear candles over the past week, I expect any reversal higher to be minor. This does not feel like the instant gratification pullbacks we have recently experienced. We need to be very, very careful here and watch for market-generated information. Turn the TV off.
I am reminded here of our good friend WWSHD (When What Should Happen Doesn’t. We normally see strong cash flows and positive returns the last few days of the previous month and the first few days of a new month. It is not happening. We are in the strongest seasonal period for the stock market from Thanksgiving to Christmas. So far, Santa Claus is missing in action. As I often counsel, success in this arena is more about watching what the market isn’t doing rather than what it is doing.
Swing Traders should continue to await my signal when the Navigator Algorithm flips the lights back on. So far, we are not there yet, but we are in the zone.
Day Traders
Spike Rules are in play this morning. Acceptance within the spike is bearish, which is where we are starting this morning. But like yesterday, traders were somewhat short in the hole at yesterday’s close, given how far away the settlement was from value and the POC.
While we are slated to open well below the Globex high, there is still potential for corrective activity early in the session. How much will be very important MGI.
Moving below yesterday’s low on faster tempo and bearish internals puts the gap and next VPOC (Key Levels) into play as targets.
The top of the gap is 4487.25, the bottom is 4479.75, and the next VPOC is at 4471.75. But remember there is about a 20-point area around the 50-day line and the channel trendline coming up from last year at 4530 or so where bulls and bears will battle out support this morning.
Overnight inventory is net long, so there could be some profit-taking at the open regardless of the ultimate direction today. You may want to sit it out for a bit until the market takes a final direction that you can monitor for continuation. The market is oversold here, at least for the very short term.
Good luck today.
A.F. Thornton