Market Holding Support after Apple (NASDAQ:AAPL)
This market is extremely overvalued, the macro economic conditions are awful, economic growth rates are dismal, but asset prices are high, expensive in fact, but this might not change immediately.
In my game plan for the remainder of this year I outlined the probability of a breakdown and then a reversal higher, a rather sharp one, but that breakdown was predicated on the downside confirmation levels breaking and they have not broken.
In fact, the market is right on those levels, at least roughly speaking with only the Russell 2000 officially tested today, so the actionable proximity, including correlated risk controls, is rather immediate.
In addition, the decision of the ECB to buy corporate bonds at or around the time of Brexit was a major influence on asset prices and almost direct inflows into equities began to be realized when the shift in their bond purchases took place. That is still happening, it will happen through March, but we do expect some signal that tapering will begin when they disclose their findings in December. Still, the December meeting is roughly 1.5 months away from now. That's an eternity in market perspectives.
At home we do face higher interest rates, but that also is a risk that many do not expect to be realized for another month or so either, but at the same time if weak economic growth persists an interest rate increase may actually be taken off the table, or so it has been debated, and that would be especially true if inflation numbers remain subdued.
Today, as the market flirted with these downside confirmation levels again, I removed the hedges that I had placed on core portfolios in the accounts that I manage at Equity Logic (visit the website). There is a strong possibility that I leave these hedges off for a month or more.
Quite frankly, if the market does not break these downside confirmation levels but instead they hold and those money flows from the ECB continue to pour into equity prices the stock market will have the ability to move higher even though valuations are stretched.
Keep in mind that expectations for next year's earnings are also still high, so there's not an earnings fear on the street even though investors were disappointed with Apple's (NASDAQ:AAPL) full year expectation given what we know about Samsung. Ultimately that is the reason apple is down so much today, not because the earnings report was bad but more so because they expected quantifiable numbers from the Samsung fallout and they didn't get anything of value.
Everything considered, the street is not afraid of forward looking earnings estimates at this time, and if the technical downside confirmation levels don't break there won't be any reason for investors to sell aggressively. One might argue that the election can play a role and be an issue, and it can, but the probabilities of it being a negative issue are low because Donald trump quite frankly dropped the ball and there's very little chance of him being elected according to money flows.
If the election is not an issue, the ECB continues to pour money into the system, slow growth in the United States persists and inflation remains low so the argument against raising rates still exists, and technical downside confirmation levels do not break, the stage could easily be set for a reversal higher and the continuation beyond all time highs without that first leg down as I outlined in my game plan for the remainder of this year.
In order for that first laid down to come the market would need to break below the downside confirmation levels, the levels that the Russell 2000 tested today and arguably that the dow Jones industrial average did as well, but those are holding and that is the reason I took the hedges off of the core portfolios and if they continue to hold I'm going to keep the hedges off for a longer duration.
If these levels break the hedges go back on.
After today's re-test, if we hold the risks of a break will be significantly diminished, but still possible of course. We can't be blind, but should be rational. The market is expensive, but if they don't have a reason to sell they won't, especially when ECB money is still flowing.