Thursday, April 7, 2016

S&P Rallies while World Crumbles

The divergence between Japan/Europe and the S&P 500 is getting extreme.  It has been a straight shot higher for the S&P since the February bottom, until this Monday.  While Europe followed along for about a month, it has been hating Yellen's dovish words as it has crushed the dollar and benefited US equities at the expense of the European ones.  Now we have Draghi coming out today to try to weaken the euro and Europe still goes down.

The yen is in a furious uptrend while the S&P has been going higher, taking on the weak dollar theme confounding the equity/yen correlation players.  It just goes to show how resilient this S&P 500 is, even while it is more hated than Eurostoxx.  The hot money flows into Europe and Japan from 2014 and 2015 have all gone down the toilet this year.  There are still a lot of stuck longs who thought the yen and euro would weaken forever.  Wall Street does its best to churn out "hot" ideas which are regurgitated over and over again until the public takes them as fact.  The hot idea over the last 18 months was the strong dollar and Europe and Japan outperforming everything else.

The opposite has happened this year.  And to an even more extreme degree ever since that FOMC meeting 2 weeks ago.  It is painfully clear that Europe and Japan were only going up because of currency devaluation, and nothing else.  There are no 3 arrows in Abe's plan.  It is 1 arrow shot 3 times.  The devaluation arrow.  And the dollar was just massively overvalued when it was EURUSD 1.05, USDJPY 125.  The fair value is probably more like EURUSD 1.30, USDJPY 100.

The dollar is still overvalued, and so is the S&P 500.  And so are bonds.  And real estate.  We are living in an overvalued world, except for trash like non-US equities.  It is getting painfully obvious, even to retail traders, that this is a sand castle at the beach, waiting for a big wave to crush it.  There is no earnings growth and the P/E is 18.  Who wants to rush into that investment?   It just so happens that the European and Japanese sand castles are closer to the water.  Another big wave will come, and it will crush the US sand castle too.

The Fed minutes pump job lasted less than 12 hours.  As soon as Europe gets its hands on pumped up prices, it does a great job of deflating them just in time for the US open.  The bulls last hope for the week is Yellen yapping away on Thursday.  I don't think even she can rescue this market again this time.  Looking for more selling to continue into Friday, which should regain its fearful reputation that it had in 2015 in the coming months.

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