Monday's hopeful bounce action ended with a thud on Tuesday morning. The primary problem appears to be a continued rise in bond yields. Even though we know that a substantial rate hike will be announced by the Fed on Wednesday afternoon, bonds have not yet discounted the impact.
The higher that bond yields go, the lower that PE will go. Future earnings are not worth as much, and that drives down PEs and causes the valuation of equities to drop. That is the dynamic that we are struggling with right now.
Unfortunately, there really is no way to know how much longer this will continue. The main argument of the bulls recently is that the market has already discounted the negatives out there, but the market is not reflecting that view. There is no way to know how long inflation will stay elevated and how much economic damage the Fed will do by raising rates to kill it. Maybe inflation has peaked, but interest rates have not.
One of the biggest problems right now is that bonds and cryptos are already starting to undercut the lows that they hit in June. Equities have not done so and still have to drop a fair amount to reach that level. In addition, we have not seen volatility measures spike to levels that ordinary reflect panic. Many technicians are concerned that we will need elevated VIX readings before we can even start talking about a market low.
It is ugly out there right now, and the mood feels particularly gloomy. It is a better technical setup for the Fed interest rate decision tomorrow than a big run-up, but don't be fooled by counter-trend bounces. It is going to take a while for this market to find solid support.
There are many stocks that I would like to buy, but I'm not going to do anything when the price action is this poor.
