Trading the Indices on Fundamentals

The only surprise of this sell-off is that the oil companies are rallying, Buffett got it right again, he bought into the oil sector last week. Aramco is the star, now just $80m away from overtaking Apple's cap, I got no explanation on why oil is rallying but it is. The Buffett Indicator has fallen to 162% from Nov21 210% high, it is still above the historical average of 140% so I believe there is more selling to go. My 30% correction target is likely (NQ & Small Cap are nearly there already) and may even overshoot as Powell, with his "transitory" crap, has screwed things up just as was expected.
 
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I think we have reached a temporary bottom. NQ & Small Caps did fall below 30%, the S&P and DOW reversed at -20% and did not overshoot as I was expecting. Markets are currently at fair value with an average PE of around 15 while the Buffett indicator is below 160% but the fair value could go lower if GDP goes lower. I believe markets are still slightly overvalued but to go lower Companies need to give more pessimistic forward guidance than those given now, this might well happen if Powell becomes more aggressive than the further 2 x .5% rate rises markets have priced in. Expect a bit of a rally for now, however, my view is that markets will eventually return to current levels and maybe go lower before year-end. I have entered several long positions during Fri session. EU had a strong week, surprisingly DAX is 2,000pt above March lows, I think the chaotic fiver that US markets had earlier this year has flowed on to the Europeans, I've stopped trading the EU markets for now.
 
SNAP's pessimistic outlook was not entirely unexpected, however, the market's reaction was. Snap's 43% sell-off brought all Tech down with it, NQ hit -30% again before recovering and even Tesla has now lost 50% from its high bringing it down to just above its $400 fair value (plus a fudge factor attributed to Musk personally). The volatility confirms we are in a bear market environment, expect more of the same, 10% to 12% rallies within a bear market are not unusual. My view hasn't changed, i.e. a rally before lower lows. I took profit on my Friday's longs and re-entered new longs close to Tuesday's lows. EU remained too rich for my liking.
 
Here is the S&P PE Ratio as of 03/06/22 recent peak:

2022-06-03-PE-4-HistoricPEAverageWithBands.png


The modern-era market average is 19.6, if we apply the standard deviations of 1.4 above the modern-era average, the current value after Friday's sell-off suggests that the broader market is still overvalued. The Buffett Indicator stands at 159%, about 20% above the historical average. I believe the NQ is close to bottoming out, however, both the S&P & DOW could see further steep losses. Upon the DOW breaking 31,000 I will then be looking to enter some longs.
 
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S&P broke the -20% mark, my target is between -25% and -30%, this is where I have buy orders, I also expect the DOW to catch up to the other indices and probably hit the 28,000 mark. History would say that retail dip buyers will come in at current levels so we might see a bit of a failing rally before new lows are made. The Buffett indicator has dipped to 152%, I expect this to get to the historical 140% average when new lows are made, 152% indicates the S&P is still higher than fair value even after Monday's sell-off, this view correlates to the view that above historical PE chart indicates. All considered, the highs reached in Nov 2021 and even March this year are unlikely to be seen until after the FED is done raising rates, even then, it might take a year or two without a recession to get back to those highs, the past highs were in bubble territory. Investors should pay attention to the PE ratio before entering long-term positions, traders can continue to look forward to daily volatility. In my view, TESLA is still overpriced at the current $644... based on revenue and production, $400 could make it good value but it being a stock heavily bought by retail Musk followers, it could stay in perpetual bubble territory.

I have no view in the cryptos other than to say these failed as being the perceived inflation hedge, if anyone does have a view then please share.
 
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Relife rally or have markets reached a bottom? With the Buffett Indicator at 30% above the historical average and PE ratios still some 40% above average, I say relief rally for now, it's probable that more selling will be seen when market players see through Powell's latest move adding cost to money while maintaining an overly high balance sheet. The Fed is just doing what markets are expecting, not what the Economy needs.
 
As players digested the Fed's move, I think most have come to the conclusion that Powell is not up to the job, he is now in panick mode and not capable of engineer a soft landing. My best guess is that markets will settle at 7% to 8% below current levels, however, a temporary overshoot to perhaps a further -15% is possible... Watch the VIX, a spike to 40 might signal the bottom.
 
Some analysts are viewing the double bottom reached on Oct20 as an S&P500 downward target and also are saying that if those lows are breached, the S&P500 could go to 2,500. These are extreme views that would need a perfect storm to materialize, however, with Powell at the head of the Fed, no gloom scenario can be ruled out unless Yellin again comes to the rescue as she did when Powell put rates on "auto-pilot" in December 2018 (standing over the idiot on stage to force him to announce a retraction). Powell's recent references to Volcker make some think that he is well and truly in panic mode and as clueless now as he was when dishing out the transitory crap, so he might adopt Volcker's style rate increases purely on the logic that it's been done before.
 
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A strong Thursday rally ahead of the critical employment data on Friday is baffling although the rally could be due to low volume. A bad number could reverse the rally as nothing in the FED's meeting notes has revealed that Powell is any less clueless... The Fed has not acknowledged that the current inflation was caused in part by the unnecessarily long time the money supply was kept high nor that they intend to accelerate a reduction in the money supply based on forecasts rather than date i.e. the Fed remains behind the curve with no apparent ability to bring themselves ahead of the curve. Even I, not an economist, can see that rates and money supply should have started to normalize back in Sep 2021 (this would also have prevented the Nov stock market bubble), Powell did not see that and is still waiting on data instead of acting on forecasts. Funny and indeed sad that the guy, as unqualified as he is to head the Fed, got reappointed as chair.
 
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