S&P Breakout above 900?

Submitted By Michael Krause
Better prudence after a 35% rally from S&P 666 dictates we get a selloff at this price range, and consolidate for the rest of the year before the next move up.

But I have a hunch reality has nothing to do with measured moves and the sarcastic title of this message isn't far from one of the cards in the deck. Data is turning up, VIX is down, treasury yields are portending recovery (remember, even though rising yields are supply driven right now, that supply signifies a direct component of GDP increase), and even the most bearish natural gas is bouncing back up.

Just as the S&P fell from 1200 to the 900 range in a period of two weeks, there is no reason why the opposite could not happen in a frenzied short covering rally. There are no sizeable sellers here. Even though this move up may be 'fake', is it any less justified than the S&P falling from 1585 to 666 (58%) over what may be less than a 10% drop in GDP?

I am not loading up here, as I already did that on the way down. But I'm not selling in my long term account either. My less 'absurd' expectation is that the S&P corrects soon, and we go nowhere for a while. But on the same coin, as I've written before, what makes a multiple? Risk free yields are still 3-4% (25-33 multiple) on long maturity money, and investment grade yields are in the 4.7% (21 multiple) range on 10 year money. Considering an equities market trading so close to replacement value, a high multiple can be logically justified. There is enormous earnings capacity to be realized as the reflation continues. So how about a 21 multiple to a forward earnings stream of $90 (2-3 years out)? Just kidding. Or am I? Pricing on earnings expectations gets several years ahead of itself all the time, especially when people feel safe to buy. Regardless of how insane that may appear, arguing the S&P should be at 1200 versus 800 (or even 400) reveals itself as an equally valid subjective exercise. Flip a coin, but the in the long run, as long as the Fed is able to print, the odds are in your favor as a buyer considering how close we are to book value in so many stocks.

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