The stock market came roaring back from Friday’s big decline and it allowed the S&P 500 take back everything it lost on that day. The rally came on mediocre volume of just 3bn shares, so that’s a bit disappointing. However, the breadth picture was very interesting. The breadth for the S&P 500 index was excellent at more than 20 to 1 positive (and 30 to 0 on the DJIA)! It was 5 to 1 positive for the NYSE Composite volume and less than 4 to 1 positive for the Russell 2000, so the wildly positive breadth in the S&P 500 was not as strong in other areas. (In fact, the advancers vs. decliners was only 1.4 to 1 positive for the Nasdaq Composite.) In other words, the “internals” in yesterday’s rally were certainly very good, but since the volume was low and the breadth was not quite as broad as it may have looked to the untrained eye, we’re going to have to see more upside follow-through before we can say that the coast is clear.
Except for some vague stories about the Fed tightening their policy at a gradual rate, there really wasn’t any new-news to account for the strong rally. Of course, much of that “gradual” theme stemmed from the expectations that Chairman Powell will continue to speak in a very dovish manner when he testifies in front of Congress today, so maybe that will indeed be enough to help the stock market rally further. However, yesterday’s rally also leaves the market quite vulnerable if Mr. Powell isn’t quite as dovish as he has been in his recent comments. (His most recent comments were less than a week ago, so there is no reason to believe he’ll change them, but if the market is looking for him to be even more dovish, it could be disappointed.)
In our opinion, yesterday’s rally has provided investors an opportunity to raise cash and add some hedges to their portfolios. No, that does not mean that they should go to 100% cash…or anything close to that level. However, as we stated in our comment yesterday morning, a less accommodative Federal Reserve means that this very expensive and extremely leveraged stock market is becoming much more vulnerable to a correction than it has at any time since the Fed first engaged in its massive (emergency) stimulus program 15 months ago.
If the stock market was trading at less than 15x earnings (like it was the last time the Fed “tapered” in 2013) and it had half as much leverage built into it (like it also did in 2013), we’d be much less concerned about the change in policy that the Fed IS pursuing right now. However, for the S&P to be trading at 15x forward earnings, it would have to be trading below 3,000 right now. Since it’s trading almost 40% above that 3,000 level, it makes it hard for people to justify today’s level in the stock market if the Fed’s stimulus injections are going to be smaller at some point in the months ahead.
Then again, long-term interest rates are definitely lower than they were for half of 2013, so maybe we should be putting a 17-18 multiple on the S&P as the level to shoot for. However, that would still take the S&P 500 down to the 3,300-3,500 range, so the stock market is still going to be vulnerable to a deep correction in the second half of the year.
Of course, maybe the economy and earnings can continue to grow at a great neck pace. However, if you think the stock market can rally to 4,500 by this time next year (which would only give it a 6.5% gain from current levels); earnings will have to grow by more than 30% in 2022 (over 2021) if the market is going to be “fairly valued” (in the range of 17-18x earnings) at this time next year.
Don’t get us wrong, we might be able to achieve that kind of growth next year. We’re merely trying to say is that it is going to be all but impossible for the stock market to remain at 22x earnings once the Fed starts providing less stimulus. Therefore, we are going to have to see another HUGE jump in earnings next year…just to keep the market elevated at/near its current price. However, it’s one thing to garner earnings growth of 30%-40% when the economy is coming off of a period when it was completely shut-down. It’s another thing to generate that kind of immense growth at any other time. Therefore, it’s going to be VERY tough to see the kind of growth over the next year or more that will justify today’s level in the stock market.
In other words, even though we expect the economy (and thus earnings) to continue to grow over the next 12-18 months, the historic/massive levels of stimulus/liquidity that has been provided by the Fed and other central banks has more than priced-in that growth. Therefore, we believe that as that stimulus becomes less plentiful, the overall growth will not be strong enough to fuel a further rally. Instead, the stock market will come down…even as the economy improves…and they’ll meet somewhere in the middle.
Shifting gears, It has been almost exactly one month since Bitcoin bottomed-out at $30,000 on an intraday basis in May. However, the initial bounce was not able to become a sustainable one. Instead, the cryptocurrency has been stuck between $30,000 and $40,000 over the past month. Actually, it did pop above $40k a couple of times, but each of those moves were stymied by the 200 DMA for Bitcoin. (It’s funny, whenever it got close to $30k, we heard a zillion calls saying the next move was going to be to $20k and each time it touched $40k, the calls came out for a quick run to $50k. Well, now we’re back down near the $30k level and people have become worried once again.)
Bitcoin has touched that $30k level (or at least come very close to it) several times over the last month. Therefore, if it drops below that level in any meaningful way, it’s going to be very bearish on technical basis. Thus the $20k level that many pundits have been pointing to recently is not out of the question at all. This will not mean that the bull market is cryptos is over, but a break below $30 will be something that will be quite negative on a short-term basis.
(BTW, Bitcoin has not seen a real “death cross”. A real “death cross” entails a declining 50 DMA crossing below a declining 200 DMA. The 200 DMA on Bitcoin is RISING, not falling. This does not mean that Bitcoin will definitely hold the $30k level once again, but we just want to make sure that people realize that Bitcoin has not developed a real “death cross” recently.)
One thing we need to highlight once again is our belief that an important aspect of the powerful rally in cryptocurrencies has been the Fed’s stimulus/liquidity over the past 15 months. No, we are NOT saying that all (or even most) of the rally in cryptos has been fueled by this liquidity. (We are long-term bulls on cryptos.) We’re just saying that it is our belief that part of the momentous rally (an important part) has been helped by the Fed’s largess. Bitcoin and other cryptos should rally further on their own over the years, but we believe that they have been pulled forward by the Fed’s stimulus. In other words, we do not think that the stock market is the only asset class that has gotten ahead of itself due to the massive stimulus programs of the past year+.
Therefore, if (repeat, IF) Bitcoin breaks down below its key $30k support level in any material way, we think that it will be a sign that other assets like stocks (whose rallies have also been helped by the massive stimulus programs of the past 15 months) will ALSO have to come down now that the Fed is telling us that they’re going to be less accommodative in the future.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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