"And so this is Christmas
For weak and for strong,
(War is over if you want it)
For the rich and the poor ones,
The road is so long.
(War is over now)" – Lennon
No, it isn't Christmas and no, the war is not over.
Covid isn't over either and inflation isn't over and the World is still warming (remember that?) and Seditionists are still allowed to roam free despite breaking down the doors of our Capital and threatening the lives of our Lawmakers – including the Vice President of the United States (they didn't threaten the President only because he's the one who sent the mob in the first place!). The supply chains have not unraveled, rates are still going to rise, our National Debt will still pass $32Tn this year and yes, the economy is slowing.
So why shouldn't stocks bounce right back to their all-time highs? As long as there are people dumb enough to pay 30 times earnings for stocks – there are going to be traders that are happy to sell them to you, after all. That's the auction process you engage in when buying a stock – how many years' worth of the company's earnings are you willing to pay for it now. A rational reason for making this bet is you believe the company will grow and, at some point, your risky return on the equity will outpace the "risk-free" (that's a whole other article) return of Bonds or TBills, which is currently 1.86% for a 10-year note and 2.26% on a 30-year note.
That is significantly below the historical averages of 4.29% for a 10-year and 5.21% for a 30-year. 4.29% is essentially 23.3 times "earnings" with the earnings being the interest paid on a TBill and 23.3 being how many years it will take to make your investment back. Since bond returns are considered "risk free" – the stock market usually commands a lower multiple on earnings than a TBill. At 2%, however, it takes 50 years to get back your money on a 10-year note and that means even the market's current 35-year multiple doesn't look terrible to investors BUT (and it's a big BUT) if the Fed is raising rates just 1% this year – then by the end of the year the "risk-free" return drops to 33 and Bond Multiples below Market Multiples are just not financially sustainable.
Rates ARE going to rise – the Fed could not have been more clear about that – it's just a question of pacing and, if the rates are going to rise, then the multiples are going to fall and what happens if, while this is going on, the actual Dollar value of the earnings falls as well? That could be catastrophic and THAT is why we are certainly not rushing back into stocks at the moment.
Almost 300 of the S&P 500 companies had their earnings projections revised LOWER in February – and they hadn't all even reported yet! THEN the war broke out and many S&P 500 companies have stopped doing business with Russia – perhaps 2% of the Global Economy – doesn't that lead to less earnings as well. Also, the strong Dollar is good for some and bad for others. The S&P 500 gets 60% of it's revenues from overseas and if they get Euros or Yen then those Dollar-converted earnings will be lower as well.
Meanwhile, as long as there is red in our 20% Correction Zone Bounce Chart – we've got no reason to jump in and start buying. As I noted for our Members yesterday, we haven't seen any kind of high-volume capitulation yet.
- Dow 36,000 to 28,800 would be a 7,200-point drop with 1,440 bounces to 30,240 (weak) and 31,680 (strong).
- S&P 4,800 is 20% above 4,000 and that makes it an 800-point drop with 160-point bounces so 4,160 (weak) and 4,320 (strong).
- Nasdaq is using 13,500 as the base and we bottomed yesterday at 13,103. 14,100 is the weak bounce and 14,700 is strong.
- Russell 1,600, would be about an 800-point drop with 160-point bounces to 1,780 (weak) and 1,960 (strong).
All that we've accomplished since yesterday is the 13,500 BOTTOM on the Nasdaq went from red to black (still on the cusp) and the strong bounce line on the Russell went back to green but three reds on the 20% correction chart is NO BUENO – keep that in mind. Biden is taking my advice on the SPR and oil prices are coming down sharply for the moment:
   
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See, you can thank the Dollar pullback for a lot of today's positive stock action.
