The dip buyers are still actively picking up dimes in front of the coming bulldozer. Even though I believed that the dip on Thursday/Friday would be bought, I couldn't pull the buy trigger just because of the weak backdrop for stocks in the current environment. Declining year over year earnings growth, high valuations, and newfound optimism on emerging markets that is based on dollar weakness hopes, not realities.
The fund managers haven't been actively adding equity exposure this year according to reports, but I get the sense that they will start doing so slowly over the next few weeks. The quant funds are usually the first to buy the rebound, then come the active managed funds, and then when the up move is over and starting the downtrend, retail comes in to buy "cheap". I expect a repeat of this base case scenario over the next month.
Unless the markets trade more volatile and there are more opportunities, I will refrain from making unnecessary blog posts. As the market has slowed down and become less favorable, I've reduced my blog posts about the current market. At a later date, I may write a few posts about trading in general, when I find the time and motivation to do so.
I've noticed over the years since I have written these posts on the market that they affect my trading, and sometimes for the worse. The more I post, the more I seem to overtrade. Overtrading is fine when it is a favorable trading environment, but if its a one way train, its best to just get on the train and hang on, or stay out of the way.
I do sense a longer term opportunity brewing but I will be patient in putting on the position. Needless to say, it is on the short equity side. In the meantime, I am waiting for more concrete signs and rumors of a US/China trade deal, which should put a local top in the emerging markets and set up a long ride down.
The Trump crew must be making a fortune trading in their anonymous offshore corporate accounts. You don't think Wilbur Ross wasn't short stocks/long puts when he said US and China are miles apart? You don't think Kudlow wasn't short when he said yesterday that US and China are a long ways from making a deal, and that Trump wouldn't meet Xi?
And you can bet they will load the boat with calls before they announce the trade deal. The White House has turned into a boiler room. Instead of pumping and dumping worthless penny stocks, they are pumping and dumping the US equity indices, with leverage.
Back to the market. That was a heck of a selloff, first gapping down and then running lower on doubts about a trade deal by March 1, and of course, the now routine last hour rally into the close. As I am writing, we are trading at the levels right after the Powell pop on the dovish Fed announcement last Wednesday. But bond yields are lower despite the SPX going nowhere since then.
Bonds have stubbornly been strong despite a near relentless rally over the last 6 weeks. And many traders are catching on, as I am seeing more fund managers and analysts calling for lower yields this year. I agree, but I don't expect yields to go lower in a straight line, unless you start seeing SPX go back to a downtrend. This is about the extent to which the risk parity trade can work, with both higher stock and bond prices. This is because higher SPX levels than what we saw this week will ease financial conditions and slowly pressure the Fed to back off their dovish talk and regain their optimism about 2nd half economic growth.
I do expect growth to slow more than most people expect, but this face ripper rally this year globally will probably delay the inevitable recession by a couple of months. The real economy doesn't matter anymore. The poor and middle class are constants, in a perpetual state of stagnation. Its the rich that are the variable here, because their fortunes are tied to the financial markets, and those things are bloated and vulnerable. When the rich feel the pain, the economy will suffer. The poor and middle class are pawns in the economic game and are easily sacrificed without any meaningful damage. More than ever, the rich are what matter in this finance-based economy.
No strong conviction on the next move, but I am leaning towards a rally next week as based on the data I am seeing, hedge funds are still very underinvested and will support the market on dips for at least a few weeks.
The market was looking for any excuse to rally coming off of the December 24 capitulation, and a super dovish Powell has done the job. The rally looks like it is near the end point here, as we approach the 200 day moving average at SPX 2740, as there is trade deal optimism and now assurances from the Fed that they will be "patient".
It has been 6 weeks since we've made the bottom, and that is usually when the FOMO and short squeeze fuel runs out and you start getting more choppy trading action. The market doesn't trade like it used to, when there was less systemized trading and more 2 way trade in uptrends and downtrends from active fund managers.
With the decline in assets of the active managers, passive management has taken over. Passive investing flows take away a lot of the short term counter trend moves and you get huge, one way moves both up and down. How else can you explain the 10 straight up days from 3:15 PM to the close? Those are passive ETF money flows getting put to work.
I have still not put on a short position, as I was waiting for more definitive news on the US/China trade deal. It will get done, and almost everyone thinks so, which will make it an obvious buy the rumor, sell the fact event. The current prices around 2730 are a good place to put on initial short positions, with intent to add more short if it goes higher. I have been patient putting on shorts, just because the up trend has been so strong and the stock buybacks are coming into the market in full force now as the earnings blackout period ended for most companies this week.
The US stock market definitely doesn't die easily, and it will probably take at least a month of choppy trade to form a top. With the lack of earnings growth, the fundamentals will be working against the market, especially at these levels. When it does go back to a downtrend again, it will get nasty.
Ordered direct from K-mart...The lawn chair that Powell has used and folded himself! Yeah, he folded like an Ed Lampert owned K-mart lawn chair.
Wow, that was fast. The Fed gave out some hints, and they were not Wall Street Journal trial balloons. They were sledge hammers nailing down the dovish message to the financial world. The rate hiking cycle is over. Going to neutral at this point with this kind of economy is screaming to the market that the next move is a rate cut, not a rate hike. The Eurodollars market started to sniff that out at the end of December, and there was disbelief in the fixed income community. Now there is universal belief that the Fed is done, and the balance sheet contraction will finish this year.
The Fed chairman is now just a cheap suit who is owned and operated by Wall Street. If Wall Street throws a temper tantrum, the Fed will listen and obey their commands. Powell tried to act like a tough guy, like he was different, but he's just a lamb in wolf's clothing. A bull in a bear suit.
The excuses for the quick flip flop without weakening economic data were lame. 1) The narrative around Chinese and European economic weakness. Narrative? Is he trying to make monetary policy or write a script for a two bit investment banking analyst? 2) Government shutdown. Last I checked, the government shutdown is over, and government workers got a free 3 week paid vacation on the taxpayers dime.
This doesn't change my outlook for the SPX. This current Fed is not the one that's causing the problems. It is the bubble that was built up over years and years that is ready to pop soon. Late cycle, over stimulated, overvalued, and no organic growth. It is going to be a disaster once all the latecomers jump on board the bull train. Powell's capitulation only speeds up the process in forming a top, as now the bulls have less excuses to not buy. Once the trade deal rumors start flying around, short 'em all.
The upside in the SPX is mostly over. There is likely another 1-2% upside after the trade deal rumors come out and that's it. SPX 2720-2730 would be an exquisite level to short. Waiting for it.
The crowd is catching up to the brutal realities of the current market. Earnings blowups are coming in fast and furious, yet the US macro data is still coming in relatively strong. Everyone sees the weakening global economy but they think it will not have a big effect on US corporate earnings.
What gets lost in the day to day happenings is the bigger cycle, which is clearly overextended and drugged up on uppers (too late rate hikes from Fed, ECB/BOJ overdoing QE, and Trump tax cuts and budget buster spending deal in 2018). You cannot expect an economy with low population growth and no productivity growth to have an organically high growth. All this stimulus justed ended up building excess capacity, malinvestment, and bubbles. The symptoms are most obvious in China because they are the ones who have overdosed the most on the equivalent of financial methamphetamines for the longest period of time.
The big picture gets lost over overblown, relatively meaningless trade issues between US/China which are easily blamed for everything bad that's going on, when the problems are much more deep rooted and more significant.
Despite all this, in the short term, there are too many events that will eventually be settled over the next few weeks (Fed meeting, tech earnings, trade talks) that could be a catalyst for a fake out relief rally that would be a beautiful short selling opportunity. Those who are short now will eventually get paid in the spring, but they may have to face some short term pain once all these uncertainties get removed.
Ironically, removing the excuses like the trade war and the Fed will only leave investors realizing how bad things are when the markets go down after a trade deal and after Powell talks dovish.
AAPL earnings are after the close, and Fed meeting is tomorrow, which would be meaningless were it not for Powell's press conference. AAPL has already let the cat out of the bag, so earnings should be a nonevent/slight positive, and I think Powell has been scared stiff on talking tough after the last meeting, so he'll probably be as dovish as possible to placate the markets.
To sum it up, I expect a last gasp rally in the next 1-2 weeks, and then choppy trade for a few weeks before the downtrend returns with a vengeance in March/April.
Here we go again. Wax on, wax off. Deal on, deal off. With a surging SPX, going up almost every day, I guess Trump thought he could afford to pretend to play hardball with Xi. Suddenly the preliminary talks have been canceled, and then uncanceled by Kudlow. What a sh*t show.
Xi is seeing right through Trump's Art of the Deal games. Xi will promise the world with regards to imports but will be vague and noncommittal when it comes to forced technology transfer and intellectual property theft. He knows what is important to China and isn't about to make a commitment that bans what China wants from US corporations.
Xi is president for life. Trump is probably president for just 2 more years. Trump wants another 4 years, so he's not going to raise tariffs to 25% on Chinese goods and weaken the US economy just to help out a few US multinationals in China. There is a lot of posturing going on, but the highest probability scenario is a lightweight deal, lacking specifics, with only cosmetic promises from China to increase US imports in exchange for no tariffs. The market will be satisfied and then the reality will hit the market a few months later when it realizes that the economy is still weak despite the end of the trade war.
The first pullback after a blistering rally off a capitulative bottom is almost always a buying opportunity. Even though I am a longer term bear, I would be tempted to buy this pullback, although its already up 30 SPX points from Tuesday's bottom in premarket trading. Confirming my gut feel that SPX will break 2700 before there is a good short set up. It is definitely much preferred to have that short setup while there is either a lot of optimism that a deal is getting done or there is a rumor that a deal has been made. Even though I know that the global economic weakness is not about a US/China trade war, but about a cyclical downturn that is long overdue. It doesn't matter what I believe, it matters what the rest of the investors believe, and they believe that the trade deal will revive the global economy.
Mnuchin is the annoying kid in the front of the classroom, raising his hand to volunteer to help his teacher, who is Trump. We got a leak in the Wall Street Journal about Mnuchin tariff cuts ahead of a January 30 meeting with Chinese officials on trade. Of course, the White House denied it, just like they tried to deny the G20 framework that would be in place to make a later trade deal. Believe the leaks, not the denials.
They are folding like a cheap lawn chair, as Xi has waited out Trump masterfully, even as the Chinese economy is deep diving, not giving in on intellectual property or forced technlogy transfers. He is sensing Trump's desperation to make a trade deal to rescue the US stock market. The Chinese will agree to a haphazard, nonbinding agreement on various aspects of IP, imports etc. for the elimination of tariffs and free trade guarantees. Expect the Chinese to keep what they've always been doing, which is steal technology, force foreign companies in China to do joint ventures with state owned enterprises while revealing all their IP, and ignore patents along the way. Much like the US/North Korea agreement, it will be toothless and all for nothing, keeping the status quo.
Mea culpa on my prediction of weakness into earnings season. I underestimated the eagerness of the Trump administration to try to rush a crappy trade deal that accomplishes nothing in order to placate the stock market. Also underestimated the willingness of fund managers chasing stocks to front run the "pop" on the US/China trade deal. This big rally all but guarantees a bloodbath after the trade deal is announced.
We are finally getting acceptance of the rally, and that it will not be going away anytime soon. It doesn't mean that the rally is over, it just means that the steep part of the rally move is over. Now there will be more choppy back and forth action, still grinding higher, but with more 1-2 day pullbacks, and no more straight up moves.
Short term trades should be made not just on short term factors, but intermediate and long term factors which affect the probabilities in the short term.
I came into 2019 expecting a quick New Year rally that would last about a week with a subsequent sharp pullback by now. Instead, the market has been relentless going higher, breaking significant psychological resistance at SPX 2600, with pullbacks that have been less than 1% ever since AAPL came out with their earnings warning in the first week of the year.
My expectations for January so far have been wrong. With this kind of strong price action, I would have expected low put/call ratios and a broader acceptance of the rally and bullishness based on a potential US/China trade deal and a dovish Powell. Instead, the put/call ratios have been relatively high, and there is a lot of chatter among traders about the market going too far, too fast, needing a pullback.
Whenever you see this kind of relentless buying off a capitulative bottom that you had on Christmas Eve, it has to be respected. Usually this kind of buying doesn't dissipate quickly, and the market tends to rally longer than most investors expect. This interpretation of the market action is based on past experience and gut feel. It feels like the world is underweight equities right now and now just starting to feel FOMO.
Longer term, I think this rally will set up a great shorting opportunity. The fundamentals are worsening and there are still too many bullish on the US economy. But its not the time to short now. Based on past instances you had this kind of price action, the rally tended to grind higher and higher. It looks like SPX 2650 will be reached sometime later this month, and a run to SPX 2680 is probable before a top. I will be patient in putting on shorts. This market is looking for bears' blood right now, so be careful shorting.
If I had a quarter for every time I heard that equities are weak because of the trade war...I'd be able to play a lot of Pacman at the arcade. Naturally, investors think if there is a trade war deal, the market is free to go higher and higher and forget all that happened in December, like it was a bad dream.
When I think about the trade war excuses, this moment in boxing history keeps popping up. Roy Jones Jr vs. Antonio Tarver.
You also can't blame it on Jerome Powell. He wasn't the one fomenting a stock market and corporate debt bubble like Bazooka Ben and Janet Yellen. Whenever a bubble is allowed to grow to enormous proportions, its only a matter of time before it pops. Of course, like the 15 minute attention span audience that is the stock investor, they will scapegoat whoever happened to be manning the controls when the bubble pops. This time it is Powell, and to a much lesser extent, Tariff Trump and PPT Mnuchin.
The bubble popping is not just a US phenomena. It is happening in China, Australia, Canada, and a few emerging markets that no one really cares about. It is taking different forms in each country, but the foundation for the bubbles has been super loose monetary policy and a reluctance to tighten even when the economy is running hot and asset prices are going higher.
Starting from last year, the global markets are finally paying the price for front loading demand and overshooting asset prices too high. It has nothing to do with the trade war, and very little to do with a few 25 bp rate hikes or a few percent decrease in the size of the Fed balance sheet. It has a lot to do with earnings topping out while stocks were at one of the highest price to book and price to sales ratios of all time.
And don't believe those people telling you stocks are fairly valued. Yes, if there is a corporate tax cut / income tax cut every few years along with a QE thrown in to monetize the huge supply of Treasuries necessary to fund the fiscal stimulus. US economic growth has been government debt fueled, just a different form than what China is doing with its economy. The only major economic zone that isn't doing this is the EU, and the financial markets have punished their stock markets relentlessly for not running giant budget deficits, providing corporate welfare, and doing fiscal stimulus after fiscal stimulus.
They say China is the one that is addicted to debt fueled growth. So is the US. It is ridiculous how big the budget deficit is when unemployment rate is at 3.7% and the jobs market is the tightest in nearly 20 years. When the cycle turns down, $2 trillion budget deficits will be the norm.
We've had a huge rally since Christmas Eve, going further than I expected so quickly. But SPX 2600 is a hard resistance that won't go down on the first attempt to break through. Based on the steepness of the December decline, I expect the market to grind higher for a few more weeks, even with earnings bombs coming up. This is mainly because of the anticipation of the trade war deal (Pavlovian response) and time needed for the market to adjust to the new range around 2350-2650 before finding what is likely to be a lower level in the summer.
Looking for a pullback this week, which probably will get bought, and set up another move higher once the tech earnings are behind us and Powell coos dovishly at the January Fed meeting. We will need a trade deal for there to be that final euphoric counter trend pop to fade with confidence. Until then, there will be hopes for a big rally on a trade deal which everybody expects to happen. It is typical stock investor behavior. Only looking at the cards that they have and not thinking about what the cards their opponents hold. There is a lot of first order thinking and very little second order thinking in the markets.
The ironic thing about the stock market is that it is the highest stakes poker game in the world, but the players mostly use only low limit hold'em analysis, not the higher order psychology and analysis employed at the high stakes limits.
What we saw in 2017 and 2018 could largely be attributed to anticipation and execution of the tax cuts, mainly corporate tax rates being reduced from 35% to 21%. With more and more baby boomers retiring and Social Security and Medicare expenses set to bust the budget, don't be surprised to see $2 trillion government deficits in the coming years. It will require very easy monetary policy for it to not affect the US economy, as normal monetary policy wouldn't be able to tame the distorted supply demand dynamics such a huge deficit would create.
If Democrats win in 2020, there will be quite a lot of pressure to raise taxes on corporations and the rich, especially considering many of the Democratic candidates are farther left than Obama.
One of the reasons the US economy has outperformed Europe is because of the big budget deficits (combination of lower taxes and more spending) contributing to greater demand. It hasn't had any negative drawbacks such as a much weaker dollar because of the interest rate differentials between the US and the rest of the developed world. But when the US economy weakens, those interest rate differentials disappear as the Fed goes back to ZIRP, and the dollar will get much weaker. It may seem like a weaker dollar would be great for the US, much like a weaker currency is great for Japan and Europe. But the US is a massive net importer, so inflation in imported goods would be a big hit to consumption for the lower and middle class. Remember in 2007 and 2008, the dollar was getting a lot weaker right up until the financial crisis hit in fall of 2008.
Contrary to what many stock investors believe, a weaker dollar is not that good for the stock market as it hurts domestic consumption, offsetting a lot of the export benefits.
The past few days rally after the AAPL earnings bombshell are a combination of funds repositioning to more of a neutral stance, after de-risking in December, New Year equity allocation inflows, Powell turning back to being a stock market slave, and optimism about a US/China trade deal that everyone thinks is the magic elixir for this market. Unlike most investors, the S&P will be more vulnerable to weakness after the trade deal, because it takes away a positive short term catalyst, without providing a fundamental change. 10% tariffs are relatively meaningless when China lets its currency weaken.
Market is up again today after a weaker open, the FOMO trade is still on so be careful with shorts. Its a tough market, trying to squeeze shorts and then squeeze longs. Over and over again.
What you saw in AAPL on Thursday will be a recurring theme as earnings are revised lower in the coming quarters. Blame China for earnings misses. These CEOs are a lot like Trump. Taking all the credit for the good times, and blaming others for the bad times.
Earnings are a much better gauge of the real economy than lagging economic indicators or pulp fiction Chinese data. We had Fedex and Micron a few weeks ago. Now AAPL this week. As the nonfarm payroll report and ADP reports show, the employment data is still strong, because companies are still not so willing to so quickly adjust to a change in economic conditions.
But there are cracks starting to seep in as the ISM numbers came in much worse than expected. The problem with looking at the economic data is that you are looking at the rearview mirror. December was a game changer. You had the biggest stock market drop in many years on a monthly basis. And the Fed still raised rates. When have you seen that before?
It is not about the Fed's rate hike path or pause anymore. It is about how late they will be to cut interest rates, waiting to see weakening employment data which is always a lagging indicator. Powell showed no urgency to react to financial markets, which is always the first to warn about changing economic conditions. He doesn't want to feed that crack addict, giving him more crack after the crash, trying to regain the high. Powell got my respect in that December meeting, even though it cost me money, because I thought he would fold like a cheap lawn chair. Instead, he had some backbone and decided not to be the tooth fairy. In the short to medium term, it is bad news for stocks. But it prevents another extended bubble and crash scenario, which will be good for stocks in the long run.
China did a 1% RRR cut overnight. They will be doing more stimulus, because they are addicted to debt and cheap money. And it will not be enough. With overflowing debt levels, they are going to have to do a mega stimulus like 2008 or 2016 to turn this ship. Problem is that it just makes the situation worse for their next downturn as the debt keeps growing. China seems reluctant to pull out their often used big bazooka this time, partly due to their effort to support the yuan, and also because there is already so much bad debt in the system.
After a bad day, we are getting that gap up, thanks to the RRR cut. Its probably a chop day today, and then a rally on Monday. So I will be waiting for that rally to put on short positions. The AAPL earnings bomb messed up the timing for the short, so just waiting for the right moment to strike.
Eurodollars have spoken: Powell is bluffing. In November, the Eurodollars market was still drinking the Fed kool aid and believing what they were saying. They were pricing in further rate hikes in 2019 and 2020. The Fed is still projecting 2 rate hikes for 2019, but the Eurodollars futures are telling a different story. It is now pricing in a small chance of a rate cut for this year.
Whenever there is a disagreement between the Fed and the STIR market, I usually agree with the STIR market. It doesn't mean that I blindly follow and believe what the Eurodollars market says. But this time, the market is forecasting future economic scenarios which are highly probably, and the economists and the Fed are still too anchored to 2018 in forecasting 2019 economic conditions.
After a massive financial bubble pops, you get quick and unexpected deterioration in the economy, mainly because rising asset prices have served as a substitute for low population growth and low wages in maintaining consumption growth levels. This is not just in the US and many other developed countries, but also in China (dependent on rising real estate prices).
With house prices going down and now stock prices, the US consumer will definitely scale back. The meager wage growth and lower oil prices will not be enough to offset this. Especially for the high end consumer, which is cutting spending rapidly.
We have a big gap down on the first trading day of the year, which is not common, but when it does happen, it is usually a bad sign for January (see 2014, 2016). I continue to believe that those panic levels on Christmas eve will be retested this month, so I am looking for a good spot to short. SPX 2530 as a very hard level to break through, so anything close to that is probably a good risk/reward short. But this market is so weak, it might not give you that level to short at before it goes back down to retest 2340. Maybe the bulls will get trapped into buying after a dovish Powell speech or trade deal rumors pushes the market above 2510. That would be the ideal time to short.
We got the oversold bounce last week, as a lack of bad news and with most of the big players gone, pension fund rebalancing was able to squeeze shorts into the close and get the market to a more neutral level.
I am bearish for January as I expect economic data to start coming in weaker and more earnings bombs like Fedex coming down the pipe for later in the month. While there may be a bit more of a bounce going into the first few days of January as asset allocators come back and add equities, the force of the fundamentals will eventually come to bear on this weak market.
I have seen a lot of articles and CNBC guests saying that the economy is still strong and will only slow down a little for 2019. That is counter to what the stock and bond markets are saying. I am hearing things like there will be no recession and that markets are panicking and being irrational. This only tells me that many investors are still in denial and poorly positioned for 2019 equity weakness. When the economic weakness is more obvious, most of the down move will already have been made, and it will be too late to short stocks.
This game is about forecasting what will happen based on fundamental and market analysis, not looking at data in the recent past and extrapolating that into the near future. I've seen a lot of statistical studies that say that in the past, under current oversold conditions, the market went higher 90% of the time. They forget that the sample is curated from mostly a roaring bull market, or at the very tail end of a bear market.
Don't forget the S&P was at an all time high less than 3 months ago. Robots and quant strategies can adjust to current conditions much faster than humans, who still are framing stock price behavior from a bull market perspective. Thus you get traders quickly embracing any rebound as a tradeable rally, like CNBC Fast Money on Friday, when in fact most of the rally is over with and quickly about to turn back to more selling.
I have sold the remaining long SPX position today on the gap up off the Trump trade deal optimism and will look to short any rally in the coming days. Anything around SPX 2525 on the short side should provide a good risk reward.
Wow, I am still surprised that the GDP forecasts are still over 2.5% for 2019. The economists are still looking at the rear view mirror in forecasting the future. We just hit the peak of the economic cycle and apparently they've forgotten how the business cycle works. GDP growth is not a steady ascent to higher highs, its a roller coaster that eventually goes higher due to underreported inflation numbers and productivity gains at the margin. Mostly underreported inflation numbers in the last 20 years.
The financial markets have spoken, and the Eurodollars market is pricing in no rate hikes for 2019 and rate cuts for 2020. While the economists with no skin in the game and with huge rear view mirrors to stare at, are forecasting 1 or 2 rate hikes, just because the Fed dot plots said so. You can't make this stuff up. They have short memories. They forget the Fed forecasting 4 rate hikes in 2016 at the end of 2015, and managing to hike just once at the end of the year, only after Trump got elected and promised a huge budget buster package of tax cuts and a surging SPX.
Stocks don't lie. The financials and other economically sensitive sectors are the worst performers this year. The earnings guidance in October were screaming to investors that the earnings cycle has peaked out. Yet too many are still believing the Wall St. and economist forecasts, and trusting the small data mined sample sizes where stocks rallied after huge selloffs.
SPX April 1991-April 2001
SPX December 2008- December 2018
Here is what happened from April 2001 to April 2003
Is that a preview of December 2018 to December 2020?
Economic cycle and Fed funds rate peaked in 2000, same as 2018. We had a massive tech bubble in 2000, similar to what happened with FAANGs in 2018.
It probably won't be as bad as 2000-2002, but looking at the big picture there is still a lot of downside ahead.
I sold some SPX longs at the close yesterday, and will dump the rest on the next strong rally, probably next week. I will buy back what I sold today at the close if SPX goes down to 2400 or lower.
It has been so long since we've pricked a bubble. 2007 was not a bubble. 2015 was not a bubble. 2000 was. 2018 was.
Post bubble markets seem much less rational because the bubble itself was irrational. SPX over the last 3 years. That is a big rally and a big correction.
Let's look at the SPX Price to Sales ratio for the last few decades.
The price to sales ratio exceeded even the dotcom mania top in 2000. Yes, corporate tax rates and profit margins are higher now, but profit margins fluctuate with the business and political cycles. It would be difficult for these profit margins to sustain forever given populist uprisings globally.
Yes, we've gone down quite a bit from the October top, and we are due for an oversold bounce, but valuations will not be supporting this market on the way down until you get closer to SPX 2100. It is not as friendly of a monetary environment as the last time SPX was at 2100, in 2016. There is tighter money and higher interest rates. On the plus side, there are lower corporate tax rates. If you say those two factors even themselves out, then a move back to 2100 would be reasonable. But unlike 2016, we are currently on the down side of the business cycle, not the upside. So that should also be considered a negative for the market.
If we have a protracted, slow decline with many bear market rallies, then the bear market can last until 2020. If the decline is sharp and steep with few bear market rallies, then the bear market will be over in 2019. I am leaning towards a protracted bear market with the decline slowing down and flattening out in the first few months of 2019, as the economy will take its time slowing down. This will give false hopes that the economy is not so bad and about to bottom, but the business cycle has turned, and that will last longer than a few months.
I expect (hope?) a holiday week bounce after the vicious selling last week, and most of the fund liquidations for 2018 should be finished by now. There will also be pensions looking to rebalance from bonds to stocks this month as the ratio has gotten quite skewed this month. I am hearing $90B from bonds to stocks for pensions. Anyway, Trump's desire to fire Powell and Mnuchin's panic reaction are putting downward pressure on the SPX futures here. This downward pressure should dissipate as the day goes on.
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The dip buyers are still actively picking up dimes in front of the coming bulldozer. Even though I believed that the dip on Thursday/Friday would be bought, I couldn't pull the buy trigger just because of the weak backdrop for stocks in the current environment. Declining year over year earnings growth, high valuations, and newfound optimism on emerging markets that is based on dollar weakness hopes, not realities. 
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