Thu 17 Aug 2006
Here’s a run down of the bullet points that make me think the US equities market is headed for a 10% or greater correction:
- With Money Market rates at 5% and the markets as a whole struggling to beat that return this year, I believe more and more people will consider keeping or moving money into these Money Markets and await a clearer direction in the market
- Like I’ve said before, the Fed wants the interest rate to be as high as the system can bear it.? This is their main weapon.? I think it’s very telling that inflation is on the high end (2.7% inflation on the year, I believe) and yet the Fed isn’t continuing to raise rates.? Why pause?? Maybe because there’s a significant risk that the market cannot bear much more and the Fed needs to pull back to keep the markets from diving south.
- It would take a serious push to get us back to the April highs, and I just don’t see where this capital’s going to come from.
- We’ve had 3.5 years of a Bull market (although since May it’s been hard to call this a Bull), and we’re overdue for a pullback.
There’s more but these are the major points–I’ve got to post this partial entry before it grows stale.? I fear that the last 3 days were a last hurrah for the Dow above 11,200 and the S&P near 1300 in 2006.
August 17th, 2006 at 9:31 am
Watch out, here comes a devil’s advocate…
On point #4 — you think we’re overdue for a pullback? What do you think just happened over the last 4 months? Look at a 3 year chart of the S&P 500. See anything interesting? Four times in the last three years there has been a “pullback” to the 200 day moving average. Each time the index languished there for a couple of months before moving on to new highs. The current pullback looks fairly similar to the one in 2004 — and P/E ratios are lower today!
Acting as a devils advocate, I would consider this still a bull (as long as your timeframe is longer than 4 months). We’ve seen choppy markets, but well within expectations based on recent historical performance. The long-term trendline has not been broken yet to the downside.
Also bear in mind, the S&P is only 2.4% from the high back in April. Even though the index might be overbought on a 2 day timeframe, there could be buying strength to push it up 3% without too much fanfare.
[Ok, taking off the DA hat…]
Contrast the S&P’s performance with the Nasdaq’s — the Nas looks a little green in the face… it’s teetering on the edge of explosive vomiting, and it is generally not good for the overall market when the more speculative market (the Nas) leads to the downside.
I would also argue that the Fed is sensative to weakness in the housing market, but much less so to the equities markets.
August 17th, 2006 at 9:35 am
The BigCharts link of the declining P/E ratios didn’t survive the posting process, let’s try this one instead.
If that doesn’t work, just select “P/E Ratios” for one of the lower indicators under the “indicators” group, select a 5 year time period, and click “draw chart”.
August 17th, 2006 at 11:21 am
I think you’ll appreciate this.
August 18th, 2006 at 9:20 am
The next day or so is critical. I’m starting to see a lot of evidence that the “soft landing” thesis may actually be working out and if the market gets wind of that, the bull could easily resume and make for a bullish 2007.