After Monday’s 1,200-point swoon, the S&P 500 (SPY) has fallen 20.88% from its February peak. And we may still have a “Sell in May” ahead of us.

This was one of the most overbought stock markets in my career. I have to think back to the March 2000 Dotcom Top and the Tokyo bubble in 1989 to recall similar levels of ebullience. It seems that everyone in the world is now dumping US bonds and dollars as well.

With a price/earnings multiple of 20, we are still near the top of a long-time historic range of 9-22. High US interest rates make that level appear even more expensive. The “Buy the Dip” crowd has become an extinct species.

So, how much lower do we have to go? I just completed a conference call with some major hedge fund traders, and thought I‘d throw out my numbers and the logic behind them. The following is an itinerary of what your summer trading might look like, expressed in (SPX) terms:

-20.88% - 4,850 – The April 9 low before a tweet triggered a monster 500-point rally.  The market is begging for a retest of this level.

-29.52% - 4,320 is an earnings multiple of 18X times unchanged earnings for the (SPX) of $240 a share.

-37.35% - 3,840 is an earnings multiple of 16X times an unchanged earnings for the (SPX) of $240 a share.

-39.96% - 3,680 is an earnings multiple of 16X times a lower earnings for the (SPX) of $230 a share.

-42.57% - 3,520 is an earnings multiple of 13X times an unchanged earnings for the (SPX) of a recessionary $220 a share.

-45.18% - 3,360 is an earnings multiple of 16X times an unchanged earnings for the (SPX) of $210 a share, which assumes the trade war with China extends into 2026.

Big swings in the market also often start and finish around an options expiration, which takes place on the third Friday of each month.

To confuse you even further, contemplate the concept that I refer to as the “Lead Contract.” There is always a lead contract around, one on which all traders maintain a laser-like focus, which leads every other financial product out there. It says “Jump,” and we ask “How High?” It is also always changing.

Right now, the bond market futures are the lead contract. When bonds rise and interest rates fall, it is a positive for equities. When bonds fall and rates rise, the “Sell America” trade is back on, leading to the dumping of all US assets. If you want to get a preview of each day’s US trading, stay up the night before and watch the action in the US bond futures in Singapore, as I often do.

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