Just wow! As you know my expectation for a top of between 165-172 for SPY is now in the zone. But I expected a sharp selloff before that happened. Maybe in the age of robots we are going to go directly to the target zone that is programmed into the computers.
I have been trying to back of the envelope this move based on the nearly one for one relationship we have between the Fed's balance sheet growth and the stock market. As of Friday the SPY is on a 37% annualized gain trajectory. The FED's balance sheet is projected to grow 32% over the next twelve months, if they keep the same pace, and 20% until the end of the year. So getting overvalued on this measure, and that is not including if Ben slows or stops printing.
The earnings yield on the S&P is is 5.4%, which is triple the current ten year rate at 1.88%. The dividend yield at 1.95%.There is still room to run here, with the big assumption earnings and interest rates rise and stay low respectively, doubtful.
The stock market is rotating out of defensive names and into growth names, and they are rotating out of bonds. This should move money into resource and energy names; kiss of death for margins in a non pricing power environment.
According to Sam Stovall and the S&P, under the current scenario, is if bond yields stay constant to earnings yield is stock price growth of 11% one year out, if the this ratio compresses however, results fall off dramatically.
So giving the devil his due, the blow off price can rise to 185 on the SPY. But having said that, I believe that ramp brings along energy prices and bond yields and will start causing some market spasms as it tries to get there. My bet is will get at least a 5% pullback before June OPEX.
I am staying with my short SPY with puts for June OPEX, same with long volatility, and long energy (uranium, coal, and drillers). I closed my gold puts for now, and may reenter if we get a spike and fail the 20 again. I also bought lottery puts (June 80)on DUST this week, as DUST is now 100% over its 200 EMA (I did the same play in April to great success),. I am expecting gravity to take hold again, and bring it to at least the 50 EMA.
The other play I am having good success, and passing to my subscribers, is a little program I wrote on short squeeze candidates. Recent names that have worked well have been CLF, COCO, BTU, JRCC, and NILE.
I will share a few of the buy ideas that hit my undervalued screen for next week, below.