The hard thing about an overheated market is timing the top of a move. We have been warning for a while now that the move is a bit overheated and to stay on alert. Last night’s pull back, although aggressive was way overdue considering the move up we have seen over the past month. Since the 14th of May we saw a roughly a 20% increase in the DOW and 17% on the SP500. So, a 5% move down really in contrast is not that bad. The big question is now, will it hold trend?
At the end of the day the FED and other central banks of the world are extremely accommodative. With no view of that changing in the near term. So, the underlying driving force of the market move higher has not gone away. So, this feels more of a large profit take at this stage, not a sell back to the low of March.
At this stage, all-time highs for the SP500 and the XJO could still be a reality this year or maybe early next, if we continue to see world economies get back up and running. This coupled with current stimulus levels get buyers back into the market.
Earnings sentiment for companies remain low, indicating weak reporting is expected for July and August, however, that was priced in with the falls. Because we already expect bad reporting this season, rather than looking for growth we will be looking to see how bad the report is compared to expectations. Then we need to look at forward expectations as compared to price action and look at forward PE ratios.
With U.S markets hammered last night our market is expected to follow suit on open this morning. The open will smash us through 6000 key support and arrive us at the next key level at roughly 5800 where the medium-term uptrend line comes in. The acceleration has broken and the pullback to the main trend ultimately makes it look healthier. Now it depends on where we go from here. A break of the main trend line does not mean we are heading back to our lows; it could just mean the underlying trend is shallowing out like the SP500.
U.S futures have pushed strongly in the green as of writing, giving our market hope that last night was an anomaly and the market will stabilize without further heavy falls. If we see a bounce from here, it will not only strengthen trend but also perhaps give investors confidence to jump in who missed out on the recent run. This may be a pipe dream at this stage, with he market having a better idea next week.
US stocks plummeted overnight, wiping trillions of dollars in market capitalisation off in one big swoop lower. The losses were significant and broad based, with recently strong airlines and cruise-lines being hit the hardest. Analysts talked about valuations (a bit of vindication for a value guy like myself) and pointed to the fact that even at the March lows, price-to-earnings multiples were still 30% greater than the 2008 trough. With the recent rally on the SP500, US shares had reached forward price-to-earnings multiples in-line with their all-time highs of the dotcom era at the turn of the millennium. The S&P500 almost reached the 7 percent trading pause circuit breaker, closing just above it. A lot of the selling can be ascribed to the pace of the recent gains for US shares, but reports of a possible second wave of virus infections didn’t help matters.
Continuing jobless claims also remained high, underscording that the economic recovery might be a bit more prolonged than recent stock market movements might suggest. It comes after the Federal Reserve warned on Wednesday that the economic outlook was quite poor, and that an eventual recovery was a way off and would take some time. Every sector fell overnight, with oil and gas and basic materials stocks being the worst performers.
This morning update is just a small excerpt from this provided by the advisers at Emerald Financial – find out more about their new equity data and research subscription here.
- Nasdaq pulls back, with selling in Tech, Discretionary, and Communication Services - May 5, 2021
- Markets continue to consolidate at top of the range - May 4, 2021
- US markets break higher again but with low momentum - April 30, 2021