A quick summary

• A COVID vaccine is here, so why isn't the market taking off?
• The bulls are still in charge but upward momentum is slowing.
• The earnings recession continues but 2021 estimates look rosy.

The S&P 500 was down 3.3% last week.

It was a bad week, down 3 out of 5 days. But it wasn't a terrible week, historically speaking. A look at the below chart shows that we have barely touched the 1-yr trendline.

Thanks to the dip-buyers, the market rarely spends much time in negative territory relative to the 1-year trend. How long this upward momentum can continue is debatable. It all depends on earnings going forward.

This is the most over-stretched market in history.

If you believe, as I do, that mean reversion (regression to trend) is a natural law of the market - as gravity is to physics - this chart should concern you. (It comes from Jill Mislinski )

Note that the market today is 172% above its long term mean. This is higher than it was at the top of the tech bubble in 2000, and the Roaring 20's before the crash and the Great Depression. 

This market can still go higher, and it probably will. But it is borrowing returns from the future. I expect the returns for the next ten years to be 5% annually, if not lower, as valuations return to their long-term average.

Earnings & Earnings Estimates

The chart below shows the S&P 500 (blue line, left scale) superimposed on the quarterly per-share earnings of the S&P 500 (gold bars, right scale). The last five bars are earnings estimates going forward. 

The market is forward-looking and it seems to be counting on those rosy earnings estimates to hold. I'm not so sure (SPX). Wall Street analysts are usually too optimistic with their estimates and downward revisions are common as we get closer to the current earnings season.

What I see in this chart is the potential for market corrections as analysts begin to rein in expectations.

Final Thoughts

I think it's likely that Tech will continue to lead the market higher, but the gap in performance will continue to shrink as investors look for value in an overvalued market. The bullish case for the market is based on a few things happening: 

• Continued Fed liquidity injections, which are likely.
• Continued reopening of businesses, which will depend on the COVID curve.
• Continued gains in employment, which will also depend on the COVID curve.
• Continued improvement in GDP growth, which depends on all of the above.
• A trough in earnings by Q4 2020 and a return to record earnings by Q4 2021.

There are risks for each of these assumptions and that's why I think we are likely to have corrections along the road in 2021.