Calyx Thoughts 4/8/2016

We've had a big run-up in the stock market....what happens next?

No question but that we have had a big run-up over the past several weeks. The psychological challenge is that those who did not catch the bottom now want to catch-up....  but the real question is not about what happened, but what will happen next. 

The S&P 500’s intraday high on December 30, 2015 was 2077. The market closed last Friday at 2072, meaning stocks have made no progress since late last year, exactly 1 quarter ago.  In fact, it was at the same level in November of 2014, sixteen months ago. The S&P 500 has been in a downtrend with lower highs and lower lows on the moving averages since last May – ten months ago.

WHY THE BIG MOVE UP RECENTLY?

Jawboning:

  • OPEC conjecture of future possible agreement to not increase production – but nothing concrete.
  • FED Moves from 4 rate hikes to 2, then will move “cautiously”
  • Possible agreement by Japan, China, Europe, US central banks to stop dollar strengthening
  • Fed governors saying that they will avoid using negative rate tool... they are “prepared to throw everything, including the kitchen sink, at markets” 

MARKET REACTION

  • Risk Off Assets are doing well, but 
  • Volumes in this up period are 1/3 that of the volumes during the down period two months ago.  Institutions are NOT buying in to this rally.

REALITY ON OIL

  • OPEC oil output at highest levels EVER. Oil production continues at a record pace!! There is a ton of supply.
  • Prices seems to have found an intermediate bottom, people got scared below $30. 

WHAT IS HAPPENING IN THE REAL WORLD OF BUSINESS FUNDAMENTALS?

  • Expect a drop in earnings this quarter. A decline in earnings says that businesses are being pressured, but it is possible that the decline may be bullish if companies beat expectations. 
  • While there is a correlation between earnings and share prices, the divergence is a bit wide at the moment.  So either earnings need to go up (not just less down) significantly, or prices need to come down if all the decades of accounting and fundamental analysis are meaningful – thus that prices relate to the fundamentals of the underlying company. 
  • PE Ratios are higher than they were in 2007.  This doesn’t mean ratios have to go down, but if earnings decline, the situation get worse! 

We seem to be at an turning point.

God bless you,
Ed & Branson


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