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10/4/22
#STOCKS – NONE
MACRO – $SPY, #RATES
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Driving home, I was thinking about the market and what is potentially behind this stupid rally, and at heart, this seems like nothing more than an oversold bounce, given a lot of bond market dislocation last week. Bonds have started to settle down.
Tomorrow we will get the ISM services, and estimates are for a reading of 56. The ADP job report is also expected to show 200,000 new jobs in September. But the most important data will be the Jobs report on Friday, with jobs expected to rise by 263,000 and an unemployment rate of 3.7%.
So this data is going to have an impact one way or another. My thinking is that rates are closer to their lows at this point.
S&P 500 (SPY)
Looking at the S&P 500, there are many reasons to think this rally ends around 3,800 or goes higher to around 3,950. At this point, I can’t come up with enough to feel the rally extends to 3,950. Additionally, if it went all the way to 3,950, my five wave count lower would be invalidated. So, I am sticking with my view for an S&P 500 to head lower to 3,500.
At this point, the rally has been a 38.5% retracement of wave three down.
Maybe I will be wrong; I can’t be right all the time. But even with the move lower in yields, the spread between the S&P 500 earning yields and the 10-Yr Treasury is right back to its lows on September 26. I don’t know precisely where the ERP should be, but something about it being near the equivalents of January 2018, October 2018, and March 2021 doesn’t feel right to me. In 2018, there were stock market tops, and in 2021, it was a peak in the 10-year rate.
At this point, I’m more willing to bet that the 10-yr yield doesn’t have too much further fall. This would mean equity values are too high, and if the ERP rises, it will be due to stock prices tumbling.
That’s going to be all for today.
Mike
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