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Short-Term Relief

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The stock market has reached oversold levels not seen in years.  While I do expect the late 2018 lows to be tested at some point in the coming weeks, there comes a time when stocks run out of sellers on the heels of a precipitous decline, and opportunistic buyers temporarily take charge until the oversold condition has worked itself out.  I think that's where we are now, albeit a TD Buy Setup 9 won't get registered until tomorrow, spurring an upward move.  But I'm quite confident the TD Buy Setup 9 will evolve into a TD Sequential Buy 9-13 or 9-13-9.   

Last Friday's low attempted to take out the 2019 VPOC, but to no avail.  And again, when the futures began trading last evening, the first knee-jerk reaction was down to the VPOC, from where the $ES went on to rally towards the VAH.  

Friends I was having dinner with 2-3 weeks ago dismissed my dire warnings to get out of stock positions they have had for years and get into gold instead.  But last Friday, they wanted to get into $UVXY (ultra VIX futures), expecting stocks to resume lower.  I don't think it's in the cards for right now.  

On the earnings front, S&P released the weekly earnings and estimate report on Friday.  With more than 96% of Q4 2019 earnings already in, the trailing 4-quarter EPS is now up to 139.72.  While this is all in the rear-view mirror, it's an important number for my valuation model.  If Goldman Sachs is right in that there won't be any earnings growth in 2020, mean reversion to 2019 levels should occur at some point, especially since we've already seen key 2019 prices revisited and breached last week by many other indices ($DJI, $DJT, $RUT, $BANK).  In fact, some of them are a stone's throw away from late-2018  levels.

Let's work out the math:

The historical average P/E is 19.4x, but when I averaged out the P/E's for the last 40 quarters (Q4 2009 through Q3 2019), the number came out to 19.78.  Hence, no growth implies a 'fair value' of 19.78 x 139.72 = 2,763 (compare that to the 2019 VAL on the chart).  At some point, I do expect this level to be tested.  But should the economic data begin to show contraction over the coming weeks, and more companies come out of the woodwork to guide lower, the $SPX will likely overshoot to the downside, just like it always does in dire times.  In late-December 2018, for example, the 'downside overshoot' was -11%.  As of Friday's close, the $SPX was still 7% over 'fair value' after reaching a lofty 25% premium two weeks ago.  

I've warned throughout February that Coronavirus and its impact on the outcome of the presidential election is a notable recessionary risk.  I've also warned that historically low unemployment usually precedes recessions.  This week's NFP is of paramount importance because "a recession indicator with a perfect track record over 70 years is close to being triggered. (See article link below)"  If March's NFP doen't show it, wait for April's.  

In the short term, I'd like to see a countertrend rally aiming to reclaim as much as 38.2 to 50% of the recent losses.  While this may seem far-fetched, such move would aim to build the right shoulder of a prospective head-and-shoulders top on the $DJI and the $RUT after both reaching their May-August 2019 lows last week.

$ES Daily Chart: http://www.61point8.com/Portals/0/article%20images/2020/20200302/20200302ES1.png 

A recession indicator: https://www.cnbc.com/2019/02/20/a-recession-indicator-with-a-perfect-track-record-over-70-years-is-close-to-being-triggered.html

Regards,

Peter                             

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