The day after Thanksgiving tends to be a great day for stocks, and this time of the year is usually a great time to be fully invested. After all, stocks are cheap, trading at 21 times NTM earnings estimates, the highest levels since the late 1990's.
Never mind that the five-year long-term growth rate for the S&P 500 is at its highest rate since 1985. Never mind that only 368 or the 505 companies in the S&P 500 contribute to that long-term growth, its lowest amount ever, which probably means that the long-term growth rate is entirely and utterly inaccurate.
So now that we have established that valuations in the market are not insanely higher but based on incomplete data, we can rest easy knowing that we have seasonality and passive flows to keep the bull market soaring.
Don’t worry about the Fed that is tapering and may taper even faster, or a market that is tightening financial conditions as a result, or slowing global growth, or even overly inflation GDP growth forecast; none of that matters. We have seasonality.
Until we don’t have seasonality, and it turns against you, then we can say it’s a holiday trading session. There is a lack of liquidity, and the shortened trading session is to blame for the 2.2% decline in the S&P 500 on Friday, Nov. 26.
Sadly, Friday had anything but a liquidity problem; volume for the half-day trading session was off the charts. Nearly 2 million S&P 500 e-minis traded on Friday, which is a lot for a market that closed at 1 p.m. The S&P 500 cash fell to support at 4590 and held that region to finish the day.
Meanwhile, the momentum indicators turned bearish on Friday, with the MACD, advance/decline line, and RSI breaking lower. The index finished close enough to the lower Bollinger band to suggest the index isn’t even oversold yet.
It looks the 2b top was also confirmed by the S&P 500 on Friday, and with an unfilled gap at around $435 on the SPY and the cash SPX, that is probably where this market is heading. That is about 5% lower than where the index and ETF closed on Friday, and given that there was no material reason for the index to go up in October to begin with, there need be no material reason for the index to fall back to 4350 either.
I have told everyone for weeks that the recent rally was on the back of multiple expansion, which was coming very late in the cycle, and that never tends to end well. The Nasdaq composite has been seeing its earnings estimates decline this entire time. So the drop in the market back to where the rally started seems like just a starting point.
The declines should expand well beyond those early October lows, and I won’t be surprised if they did before year-end. As I have tried to warn repeatedly, financial conditions have been tightening, and that is because the market is preparing for a Fed that is becoming less dovish.
The COVID-19 variant news over on Friday was sort of just an accelerant. The COVID-19 news may not last long and even lead to a snapback rally and refill of the gap at 4700. I would prefer for that gap to get filled as quickly as possible.
VIX (VIX)
The other thing the market has got going for a potential snapback rally to 4,700 is the VIX. The VIX is currently trading at 28.6, implying the S&P 500 will move around 1.8% every day for the next thirty days. So at this point, unless we open down by 1.8% or more on Monday, the VIX should start to drop, which will help cushion any declines and potentially assist in aiding a rally.
Again, any rally in the S&P 500 isn’t likely to last because conditions for the equity market are becoming more and more unfavorable.
Amazon (AMZN)
On to dead money, a.k.a. Amazon. It looks likes a successful retest of the broken uptrend, and well, we are getting closer to being able to call a double top in the stock. Officially for this to be a double top, the stock needs to sink below 3,200. Given the stock's valuation, horrible quarter, and guidance, that shouldn’t be too hard. I would think the 3,200 serves as short-term support, but ultimately that should break.
Alibaba (BABA)
The gap in Alibaba from 2017 is now nearly filled; maybe that’s where the CCP wants to get long.
Ford (F)
Ford has a huge gap to fill, around $15. I know Ford will be making EVs, which means it is worth more than it was before it was making EVs. How, I don’t know, but I’m sure there is some story floating around out there that is half as good as the seasonality story.
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