Weekend Update: SP500 to bottom (possibly) this upcoming week

2022년 5월 7일

All hope is lost. The Federal Reserve has lost control of inflation. Interest Rates are the highest in Decades. The Stock Market is un-investable.

To me, these headlines are the sound of music. The stuff bottoms are made of. Let's take inflation and interest rates. The newer generations of stock market traders have never had to learn the lesson of " Mean Reversion".

Investopedia defines this as a theory used in finance that suggests that asset price volatility and historical returns eventually will revert to the long-run mean or average level of the entire dataset. That gobbly-gook basically says as it pertains to inflation and interest rates when you artificially mess with interest rates to control inflation, eventually the intervention unwinds and reverts to mean data set of where it would've been had not intervention taking place.

In the 1990's mortgage rates were as high as 10%. January of 1990 the yield on the 30yr Treasury was 7.5%. In January of 2000, that yield was 6%. In the same timeframe the stock gained 500%. Enter one Alan Greenspan, a Ben Bernanke and subsequent others starting with Larry Summers under Reagan and we used the Federal Reserve to intervene on all sorts of things and much more frequently as time went on.

Inflation and interest rates will play out they way they'll play out. In my opinion, these macro economic data sets will have little effect over the long term. I know you'll think I'm Looney...but if I told you the stock market would absolutely flourish at 7% yield on the long bond, you would laugh. You would say the stock market would be dead money and bonds would be the place investors would flock too. Maybe, for a short period of time, but entrepreneurs and innovators have a way of making ideas blossom in even the harshest financial environments.

As we read the reports of "Runaway Inflation" and Jerome Powell is not the man for these economic times to steer the fed...The Stock Market is busy bottoming. It's hatching it's plan to run to 5200 and telling only a few.

For those who listen, this next dive down will be a major wave IV bottom of the larger wave 3. The area of the wave 3 top should reside in the 5200 - 5500 area. Getting there should take the rest of the year maybe even 1st quarter of 2023.

Best to All,

Chris