Trading the Indices on Fundamentals

Wed saw a bit of a dip in the NQ on good vaccine news (a vaccine is bound to affect tech downwards), however, the dip just gave a reason to buy, it, plus the S&P, closed at new record highs. Dumb money has no regards nor understanding of valuations, just follows news on virus developments (just news on a vaccine or cure, even infection surges are disregarded) relentlessly buying as long as things are NABAF, these new "stay at home" traders with spare helicopter money see stocks through the prism of NABAF i.e. disregard PEs and everything else. NABAF trading is a wonderful thing because NABAF means you don't need to give up on a stock just because its earnings are lower than in 2019.

On the other side, smart money that bought in April and May are rubbing their hands in greed unwilling to sell as long as the momentum keeps making new highs, however, they are not comfortable with current levels and although not willing to sell, they continue to buy insurance against a sell-off. So far this week the VIX has been surging in the face of new hights by the S&P, even today the VIX was 1% up and the VIX futures are a full 5 units above that. The VIX is more than 100% up to what it was last Feb when the S&P was making new highs. Smart money will eventually sell to lock-in profits, probably triggered by election jitters, when that happens, markets will correct to justifiable valuations and probably overshoot for a short time.
 
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Here are the stats;
Prof Shiller puts the 20-year PE average at 25.7, it is currently 38
Buffett puts the fair value of the S&P500 at 93% to 114% of GDP, it is currently 188%

At the extreme of this euphoria is TESLA that has a production of .02% of world total car production but now has a market cap equal to the next 17 car companies combined.

Another major distorter is house prices, Shiller calculates that were it not for the moratorium barring banks to foreclose on unpaid mortgages for the next 12 months (might be extended), house prices would have collapsed to close to the levels they did during the sub-prime crisis.

Between the Fed and other fiscal action, one has to say that we are within a period of major market manipulation, requiring the economy to fully recover to pre-pandemic levels within a year to avoid a meltdown in prices. Considering the vast number of bankruptcies and zombie companies, it is hard to see that things can be back to normal within a year from now.
 
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I'm confused as to why you care about any of this?

Are you trying to be logical and pragmatic about why markets are doing what they are doing - or are you trying to make money?
 
Relentless said:
or are you trying to make money?
More...
Yeah, this one.

Day trading can give a sustainable average of .5% profit per trade, but, if one positions oneself to catch the longer term big moves on top and in the background then that's how a trader can excel with little additional effort. That's why fundamentals matter and also why the name of the thread is what it is.

If you need to ask then you are following the wrong thread.
 
FXtrader8911 said:
Yeah, this one.

Day trading can give a sustainable average of .5% profit per trade, but, if one positions oneself to catch the longer term big moves on top and in the background then that's how a trader can excel with little additional effort. That's why fundamentals matter and also why the name of the thread is what it is.

If you need to ask then you are following the wrong thread.
More...


 
Last week saw some profit-taking perhaps indicating that the highs have reached unsustainable levels for now. However, although the NQ took a 1,000pt hit, the dip was nothing exciting, it didn't even wipe-out the Aug gains, but the VIX remains elevated to twice what it was last Feb, a sure sign that smart money is expecting increased volatility. I go along with that... the virus is where it was, tensions with China are increasing and now the elections are close, uncertainty should cap market rallies up to the elections and a messy election where neither Trump nor Biden is a clear winner and Pelosi takes the presidency might well trigger a substantial sell-off.
 
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Powell spoke y'day warning that the economy is not recovering as fast as people think. Ever since his "Autopilot" announcement at the start of his term, I considered Powell as an egoist, know-nothing Fed chair but lately, he has been more on the ball, however, I can't determine whether he is stating actual facts or is trying to appease Trump with his announcements (trying to influence congress to move towards Trump's policy).

Dismissing Powell, other economists are indeed saying that the US economy is not in good shape, believing the majority then one has to conclude that the markets are wrong.

How long markets will remain wrong is a guessing game that will make some traders rich, others broke... markets may correct or may not correct, but one thing most are in agreement on is that the economy won't catch up to current market pricing till 2022 or at earliest, till late 2021. What happens in between is the guessing game.

I remain positioned for a sell-off which may become a long-lasting correction.
 
Thu saw investors on edge digesting Powell's warning on the state of the US economy which put focus on the outlook of further coronavirus stimulus as well as the timing of a viable vaccine. As previously stated, virus disruption made big tech the big winner, a vaccine is likely to reverse that so it is no surprise that talk of a vaccine being available soon is hitting big tech companies, most are in correction territory having fallen more than 10%, the NQ reflects that.

In reference to Powell's warning that the economy is not growing as fast as people think, Tom Martin, senior portfolio manager at GLOBALT said "The market had gone up too much, too fast and valuations got to a point where that was more noticeable now than before, So now you're seeing the market correct a bit."

As said in my Wed post, markets are wrong. Before this 10% correction, they were very wrong, now they are just wrong, I'm targeting a DOW at around 24,500, i.e. back to May20 levels. This is the level that fits the current fundamentals and what I consider fair value without discounting for the uncertainty of elections, however, I'm not confident that it will get there... would be good if it does as then trading can be tied to earnings rather than euphoria but the RobinHood boys are still programmed to buy every dip, so markets remaining wrong is a possibility as long as money printing and helicopter money to the RobinHood boys continue.

I don't think US markets will ever return to the March20 lows but a 22,500 DOW is also possible if a black swan happens and markets overshoot fair value. Perhaps a messy election where neither Trump nor Biden is a clear winner and Pelosi takes the presidency might do the trick.

Even though elections are in just 2 months, markets have not yet factored-in this possibility nor the uncertainty a Biden win will create, in fact, markets are currently not factoring-in anything other than what the Fed is doing, ever uncertainty is being ignored... this is the first time that I have seen markets rally in the face of so much uncertainty.
 
Looks like the professional money managers are in charge again, the buy-the-dip RobbinHood boys are getting a lesson in how markets work and why fundamentals are relevant.
 
At the low of the session on Mon, the S&P was 10% down and the NQ hit -14%, although Mon saw a bounce at session end, all the indices are close to correction territory. Anybody that bought the dip 5 days ago and doubled-up the next day is probably licking their wounds now. Can markets go further? another 5% is quite probable, if not immediately, then a bit closer to the elections. Plenty of uncertainty out there and I think the new-gen market players are starting to realize that that looking only at the technicals can get them in trouble regardless of the up line of the technicals.

Valuations are still too high... Total market cap over GDP (after this correction) is at 173% of GDP, 30% above the historical average, meaning that even in a perfect post-election world that has beaten the virus, the economy has a long way to catch-up to make the current valuation look reasonable.
 
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