It is not common to see the VIX rise so much with the market. The VIX was trading as low as 9.5 on Tuesday and by Thursday, after 2 big up days, we are at VIX 11.3. I see this as a sign that we are running on fumes for this rally. With volatility a bigger part of portfolios, it has become a stronger indicator of future SPX direction. Although there have been some stumbling blocks on the way to the Senate passing its tax bill, it looks like the holdout Republicans are saying yes, one by one. Although with the very few deficit hawks out there, it looks like it will be watered down and scale back the corporate tax cuts sooner than expected.
Will the tax cut bill passing be the sell the news top? I don't think it will be that easy, but it will probably be the start of the topping process which should last several months, much like 2015. I see a lot of parallels this year with 2014 from a rally duration and sentiment perspective. Except the big difference is that the dollar was strengthening in 2014 and it is weakening now. The USDJPY is quietly trading in a range that is below the highs set in 2015.
It doesn't seem to make sense that the dollar is weakening as the Fed tightens and keeps its promise of 3 hikes this year. Also, we are on the cusp of a tax cut which is supposed to boost US growth, which should be dollar positive. But yet the dollar can't seem to go up. What I see as a possible trigger for even further dollar weakness is the global economy actually weakening, which would force the Fed to stop its rate hikes, which would suddenly make dollar bulls turn into dollar bears. Right now, we are still seeing a lot of disbelief that the euro is so high against the dollar even as the Fed keeps tightening.
We are seeing more volatility in the S&P these last 2 days. At turning points, you tend to see volatility rise, even at tops. I think we are close to one of those turning points. Early December can still be weak for the stock market, so there is still a little bit of time for bears to go to work here.
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What level does the spx need to trade to have the same multiple as it does now given the increase in earnings from the tax cut?
Not sure, but market has been going up in anticipation of tax cuts, so the multiple should be compared to the S&P pre November 2016, to be intellectually fair.
Well, earnings also increased over the past year so it's not just multiple expansion that gets us to today's 23 X earnings as the SPX multiple. Rough guess leads me to believe market needs to trade at 2900 to be at fair value compared to today's multiple given the forward boost in earnings from a 9% to 10% tax cut. Given no growth in earnings, so the real level could be closer to 3000.
But I agree with your assessment that the multiple should be compared to what it was before trump was elected as the market did not discount that prior to the election. And I see that it was 23.35 in November 1, 2016 vs 24.8 on November 1, 2017. Just my opinion but I think the multiple needs to expand more to fully account for the boost in earnings from the tax cut along with the natural growth in earnings.
Also, the tax cuts are not permanent, and will last about 8 years, so the addition to net present value of stocks is not as high as you would think.
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