Looking for Signs
Folks, when a pullback like this takes place, you have to start looking for signs of what the next catalyst will be—the next thing that will drive a market up or down. I’m seeing a few right now that have me feeling very bullish, so I’m just going to come right out and say it: this pullback could be the best buying opportunity for equities we see all year!
Digestible levels. When a Goldman Sachs makes an end-of-year projection on the S&P 500 –1450 is the scaled-back figure they came out with a few weeks ago—the way they get that number is they take earnings times a multiple. Earnings are a hard fact—in this case we’re looking at about 100/share. The multiple is the art, so if the projection is 1450, we know the multiple Goldman is painting with is 14.5 (100/share x 14.5 = 1450). Right now, the S&P is trading just under 1300, which means the multiple is just is under 13 (100/share x 13 = 1300). When you look at the relative value in terms of that multiple, the S&P hasn’t been this cheap in over 8 months.
Corporations are flush, and that cash is practically burning a hole in their pockets. We’ve heard a lot of news about M&A events and companies announcing stock-buyback programs these last few days. That tells us they know things are undervalued right now. On CNBC this morning, Richard Fischer, president of the Dallas Federal Reserve—who I think is terrific, by the way—said that in terms of liquidity, the tank is full as far as U.S. companies are concerned. It’s just a matter of who steps on the accelerator first.
Quadruple expiration. The third Friday of June is one of those quarterly expirations where everything expires at the same time—futures, options, options on futures, options on stocks. We’ve talked before about how markets have a difficult time breaking during expiration weeks, and I’ll get deeper into this topic it as the “quadruple witching” gets closer.
Meanwhile, I’m still watching the 10-year T-note to see if cash is working its way back into the market yet. I’m also keeping an eye on the velocity of inflation and hoping it stays at a healthy rate. I’m being mindful that markets never go up in a straight line, and they won’t come all the way back at once. I predict there’ll be some volatility for the next week-and-a-half leading up to a summer rally. Let’s see if I’m right!