The S&P 500 closed at 20.4 x 139.47 (2019 full-year earnings). But now that the earnings season is underway, the trailing 4-quarter (real) earnings are down to 137.17 (with a little over 4% already reported). Hence, this number will be updated every weekend upon receiving new data, and it won’t stabilize (become reliable) until mid-May when over 80% of companies will have already reported, and more importantly, guided forward. For now, I'm going to assume a P/E multiple of 20 to 21, hence I'm going to set a valuation-based resistance zone as follows:
Lower: 20 x 137.17 = 2743
Upper: 22 x 137.17 = 2880
In my opinion, the 2880-2900 area should prove impenetrable in the short term from both the valuation and technical standpoints. Hence, the S&P 500, right here, is very vulnerable.
It's also worth comparing the current price of the S&P 500 in terms of the 2019 real earnings of 139.47; the question is what multiple is reasonable in the current environment: 17? 18? 19? 20? 21? There's no magic P/E because valuation is in the eye of the beholder. But I think it really comes down to where these multiples collide with the technicals. We already know that pundits sing their own songs, so let me sing mine.
- Target 1: 17 x 139.47 = 2370
- Target 2: 18 x 139.47 = 2510
- Target 3: 19 x 139.47 = 2650
- Target 4: 20 x 139.47 = 2789
- Target 5: 21 x 139.47 = 2928
Note: The 4-quarter average P/E has consistently registered 21 to 22 throughout 2019.
Since 2743-2880 is a key valuation-based resistance zone, what do the technicals have to say?
- Down-sloping 50-sma (daily timeframe) = 2890
- Lower boundary of immediate open gap (March 10 high) = 2882
- Technical pattern (a-b-c zigzag) objective = 2890
- TD Sell Setup 9 (daily timeframe) = due on Friday (Tom DeMark indicator)
- Mean reversion to 20-sma (monthly timeframe) = 2888
- Mean reversion to 100-sma (weekly timeframe) = 2880
- Mean reversion to 2019 VPOC (largest volume bar) = 2890
With all this in mind, what I haven't factored in yet is the impact of the unprecedented stimulus measures on equities. Well, this has been on display for four weeks. But it's one thing when the economy is functioning reasonably well (or needs a bit of greasing) and another when it's at a near-complete standstill. The stimulus is simply buying the economy time (backstop) until it reopens. Who knows if this will even be a positive? As of now, there's neither a cure nor a vaccine for COVID-19; but America being America, expect a positive surprise sooner than later. Another important question concerns unemployment: with millions of Americans out of a job, this pandemic will certainly redefine the workplace dynamics and consumer behavior in a post-COVID-19 world. For example, when I look at AAPL trading near 290, I can't help but think it was at 214 just a few weeks ago. What has changed since? Who's going to buy a new iPhone, a watch, or a pair of AirPods when food and toilet paper top the priorities list? Hence, expect this week's bullish action to run into a brick wall soon, maybe as soon as tomorrow when the economic data start to matter again now that valuations and technicals are stretched.
Finally, with stocks currently in neutral territory (2019 'fair value' of 2880 = no-growth / best-case scenario for 2020), earnings and guidance will soon take center stage. And again, there's the reopening of the economy and how it's going to play out in the absence of a vaccine.
Chart 1: The price of the S&P 500 is approaching 21 x trailing 4-quarter earnings. (Learn more about the TriModel framework).
Chart 2: S&P 500 (futures) daily chart (where the rubber meets the road): following a climactic decline, a mean-reversion move is to be expected. More often than not, the zone of the A-B-C's wave-B is retested and sold into.
Peter Ghostine (@peterghostine)
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In early June 2019, I called for a major bear market to begin once the S&P 500 reaches ~3400 in 2020. I specifically cited "unknown reasons" that would only be identified retrospectively. Watch the shortened version of the forecast: The Supercycle's Fourth Wave.