Well, that was a thorough selloff. To see the market hit its circuit breakers four minutes into trading was an amazing sight Monday. Things were not any better at 3:59 p.m. ET than they were at the resumption of trading at 9:49 a.m. and that was a telling technical indicator.
In times such as these, anyone who says anything to the effect of "the market is trying to make a comeback" or "it is trying to rally" is sadly mistaken. No professional trader is trying to do anything but make a profit. If that is on the short side, then so be it.
So, long-only folks are at a disadvantage, but as I mentioned in my column on Monday, individuals still maintain an advantage over the pros in a market crash. You can sell faster than they can. The idea of a payroll tax or other stimulus from the Trump administration floated the futures, but always beware of the dreaded bear market bounce.
Monday's carnage was apparent in so many sectors. When will it stop? When the bond market stops rocking. When will that happen? I just don't know. Remember, though, that falling bond yields mean rising bond prices, and this equity market pullback has coincided with a rally in the bond markets that is unprecedented in my 30 years of following them.
Seriously, it is historic stuff. And just as you thought that Apple (AAPL) couldn't be stopped at $300, then $310, then $320, and as Microsoft (MSFT) set new all-time highs at $150, $160 and then $170, the same conclusion could be drawn for U.S Treasury bonds. The 10-year U.S. Treasury note finished trading at $108.4. Why can't it go to $115? Yes, that would imply a negative yield, but so what? Capital gains are real and intense in the bond market.
We live in a world where Tesla (TSLA) shares went from $300 to $900 in the space of two months, so let's not heap scorn on those seemingly frenzied propeller heads who trade bonds so quickly. Anything can happen in the midst of a rally.
I continue to stick with my call that the next technical support level for the S&P 500 is at the Christmas Eve 2018 lows. Stocks were cheap then, trading at 14.7x what eventually would become the full-year 2018 earnings for the S&P 500 of $160 per share (EPS) in 2018. Fast forward two years and understand that aggregate S&P 500 earnings in 2019 barely grew (computation methods vary, but it was certainly less than 1%). Now with the world in the throes of Covid-19 and oil prices plunging, I think the S&P 500 will be lucky to produce a third consecutive year of earnings parity. Really, it will be a stretch to get to $160 this year, even though the consensus is still well above $170.
The last time stocks were cheap was when the price-to-earnings (P/E) multiple fell below 15x forward earnings. Those earnings haven't changed, and I see no reason to put a premium multiple on a world economic situation that is so incredibly difficult to predict right now.
Everything old is new again. Fifteen times EPS of $160 gets you a fair value for the S&P 500 of 2400. That's nearly 13% below Monday's close of 2746, and in those situations the market tends to overshoot to the low side.
So, I will be buying stocks at 2351 but not before, and I certainly have not yet covered any bearish positions -- which include puts on the aforementioned Tesla -- for my trading firm.
The thing that is most refreshing to me is that not once in this column have I mentioned the Federal Reserve. OK, just a few words on Chairman Jay Powell and the crew that populates the Federal Open Market Committee (FOMC). They flooded the market with fresh dollars beginning in October, all the while saying it wasn't quantitative easing (QE) even though we all know it was, which turned out to be four months too early. They then pimped themselves with an emergency rate cut of 50 basis points last week, and that turned out to be early by one week.
Powell & Co. are no better at reading the markets than you are. Bond traders have taken over and, frankly, I am feeling relieved. I don't care what the Fed does next week. Interest rates are effectively zero already at the short end of the curve and the FOMC's potential for impacting equity markets is now very close to zero.
Just because Jerome Powell clearly has no skill in that area doesn't mean the market can't be timed. Do yourself a favor and do it yourself.