Let's assume that instead of having earnings growth, we have an earnings contraction. That is severe, because we are going into the negative range. Right now the E1 SPX estimates are 232. Suppose it drops to 200. Similarly, right now TNX is projected to peak at 3.8%, but assume the market is really wrong and it hits 5%. That would be a 20 year high to go with the 20 year high inflation. We're talking extreme cases here.
What would be the fair price for SPX then? At TNX = 5% and E1 = 200, the "fed model" says fair SPX value will be 4000. Now the market is not going to be at 4000 when we get there. The market will be discounting the future earnings and the future interest rates. So the fair value will likely be closer to 4500. Now project that back to present. How much risk premium do you want for peak 4500 a year from now? 30% seems like a good deal? That makes the present day fair value to be 3462, or about the 3500 bottom price that I picked.
While it is true that the market can go below the fair value, I would argue that I presented an extreme case which is rather unlikely and is already discounting a lot of bad news. If the earnings just stay flat, which I think is the realistic worst case scenario, and TNX peaks at 4%, which is still above the bond market projections, then the fair value by the peak time is closer to 5300. Again, apply your risk premium and there is your buy point.
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OK, let's talk immediate term. The stocks are extremely oversold. The far out stocks have held well. ARKK has not made a new low with the indexes. Neither has XBI and other far CF ETFs. This is certainly a sign of market bottom or at least of impending market bounces.
On the other hand, BTC has drained a lot of money out of the pockets of retail investors who would buy things like ARKK. So they are going to be busy licking their wounds. The Fed is going to let MBS and T-bills expire, and that is more capital drain out of the market. And even energy stocks are falling, which should add to the investor anxiety. Additionally, we are entering the quiet period and companies aren't going to be able to buyback shares.
Stocks don't move up just because they are oversold. They need to actually have some buying pressure coming in. There is some evidence of capitulation, and if that happens and then the stocks don't fall on bad news, then we can see a (sharp?) rebound.
Also, we are entering the quarterly rebalancing period. And this too will have an impact.
So the rebound, IF it is going to happen "soon", is either going to happen within the next 8 trading days, or it will happen in about a month. This is just based on the flow of funds. But hey, anything, even negative oil prices, can happen.
Overall, I expect very volatile days ahead.
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PS I remind everyone that my posts are copyrighted and if someone is going to take my analysis and ideas, they should contact me first. In general I am ok with it, but credit should be given where it is due. |
