Where?s This Market Bottom?

After yesterday?s 267 point swoon, the S&P 500 (SPX) has fallen 4.2% from its late March peak. It looks like the ?Sell in May? crowd, of which I was one, is having the last laugh after all.

Is this a modest 5% correction in a continuing bull market? Or is it the beginning of a Harry Dent style crash to (SPX) 300 (click here for the interview on Hedge Fund Radio http://madhedgefundradio.com/radio-show/ )? Let?s go to the videotape.

This was one of the most overbought stock markets in my career. I have to think back to the top of the dotcom boom in 2000 and the pinnacle of the Tokyo bubble in 1989 to recall similar levels of ebullience.

In fact three weeks ago, we were at a real risk of a major melt up if Vladimir Putin hadn?t come along. So the modest selling we have seen so far has been welcome, even by the bulls.

There is still an excellent chance the current decline will be nothing more than a pit stop on the way to new highs, as long as WW III doesn?t break out. Institutional weightings in equities are low, compared to 20 years ago. Individuals have yet to really dip their toes in stocks, still scared by the events of 2008-09. It seems that everyone in the world is overweight bonds.

In recent days, the ten-year Treasury bond yield has fallen to 2.62% a mere 35 basis points over the S&P 500 yield ratio at 2.27%. With a price/earnings multiple of 15.5 times this years earnings, we are bang in the middle of a long time historic range of 10-22.

Zero overnight interest rates argue that we should be at the top end of that range. The argument that the ?Buy the Dip? crowd is still lurking under the market is real, just a little further than the recent dips allowed.

So how much lower do we have to go? The following is an itinerary of what your summer trading might look like, expressed in (SPX) terms:

6-3.2%% - 1,839 was the 50 day moving average, and we decisively broke through that yesterday. The augurs for more weakness to come.

-8.4% - 1,740 is the 200 day moving average and could be our next sop

-16.8 ? 1,580 is the breakout from the double top that extends all the way back to 1999

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 NASDAQ 100 (QQQ) is the lead contract. Every flight from risk during the past two years has been preceded by falling technology stocks. If you want to get a preview of each day?s US trading, stay up the night before and watch the action in Tokyo, as I often do.

You might even learn a word or two of Japanese, which will come in handy when ordering in the better New York sushi shops.

The Best Case

 

The Worst Case