Written by Gary
Midday Market Commentary For 01-21-2014
Right after I posed the opening commentary (@10:30) the markets fell to their opening numbers and the DOW went further into the red. The SP500 attempt and failure to make new highs this morning is not a sign of an impending market decline as some many are now claiming. It is just a pausing of sorts and I have little doubt of another SP500 try later in the week to test its previous highs.
By 11:15 the markets started to fall further below Friday's closing numbers in what looked a complete sell-off, but stopped short of a eye-opening decent. By noon the averages had leveled off putting the markets in a flat and mixed environment that may or may not fall further today.
Are stocks overvalued as some think they are?
Ten days ago, the few carbon-based habitual gamblers left in the market stopped and read Goldman's report which, as we said, may have 'just killed the music' with its slam of the market saying the "S&P500 is now overvalued by almost any measure."
Recall: "The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates.
Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings."
Since then, many of Goldman's client must have been displeased that David Kostin refuses to drink from the punchbowl anymore, and sent in their complaints.
However, Goldman has refused to budge and issued a follow up defense to its thesis that stocks are overvalued more than at any other time except the tech bubble with "Valuation fact vs. fiction part 2: Responding to common questions about S&P 500 valuation."
The decline of the markets is perhaps linked to this dumping explained below, but does not explain investors worries about the markets futures and the earlier market fall (@10:15). This market is VERY weak and it won't take much for it melt downward and that may offer some good buying opportunities.
Starting at 11:06, S&P futures began to slide, picked up at 11:09, then at ~11:11:11, someone decided to dump 6,800 e-mini contracts in one second all at once in a nice fiduciary-duty-worthy trade as Europe begins to close and POMO ends: the kind of idiotic dumping through the bid stack that is not only allowed, but encouraged in gold and silver.
That is around $625 million notional in a second. Volume overall was huge in the last few minutes (as the chart below shows). VIX jerked 0.4 vols higs to 13.4%; JPY banged higher against the USD (but stocks still well below JPY expectations); and bonds quickly bid 1-2bps.
This dump in the S&P drops it back to one-week lows.
The short term indicators are still leaning towards the hold side at the midday, but I would advise caution in taking any position during this volatile transition period. There will be pressure to climb higher if only to test the previous Blue Chip highs, therefore I do not foresee the markets descending below the sideways channel they are currently in until AFTER those highs are tested.
The longer 6 month outlook still remains 40-60 sell until we can see what the effects are in this almost nothing start of the Fed's 'Taper'. By March investors should know how the taper is going to work out in relationship to the stability of the US financial markets and their ability to not to slide downward. For now, I am continuing to expect weak to negative markets for the foreseeable future.
I would also take chart and other technical indicators with a grain of salt for the time being and watch what the Fed does over the next 4 months. Removing 10 billion from the bond buying program each month isn't going to do much in reducing the QE program in the beginning, but halving it in 4 months certainly will - IF - the Fed's continues the taper program.
My instincts tell me that the Keynesian's are going to be reluctant to stop their grand financial experiment and will want to taper the taper within the next several months - especially if the employment rate increases. Also, watch for QE5 when Obamacare starts drags the economy down into trouble in 2015.
Also, many pundits have stated that we may have seen the top - but I wouldn't count it as long as the Fed continues to hand out 'Market Viagra', even if it has been reduced somewhat! I would like to see a blowout candle (shooting star) to verify a top along with heavy volume to signify a market top.
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The DOW at 12:15 is at 16328 down 130 or -0.79%.
The SP500 is at 1833 down 5 or -0.29%.
SPY is at 183.17 down 0.45 or -0.24%.
The $RUT is at 1169 up 0.32 or 0.03%.
NASDAQ is at 4199 down 1 or -0.04%.
NASDAQ 100 is not reporting today.
$VIX 'Fear Index' is at 13.35 up 0.91 or 7.32%. Bearish
The longer trend is up, the past months trend is bullish, the past 5 sessions have been mixed in a sideways channel and the current bias is negative.
WTI oil is trading between 93.93 and 95.44 today. The session bias is negative and is currently trading down at 94.71.
Brent Crude is trading between 106.23 and 108.00 today. The session bias is negative and is currently trading down at 107.16.
Gold fell from 1255.50 earlier to 1235.60 and is currently trading up at 1241.70.
Dr. Copper is at 3.350 rising from 3.315 earlier.
The US dollar is trading between 81.16 and 81.53 and is currently trading down at 81.20, the bias is currently negative.
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Written by Gary