The Market Goes Full Blown Cobra Kai

Equities start the day lower as the market goes full blown Cobra Kai karate chop.  Danny Laruso ain’t got nothing on this market, its chop chop chop all day everyday.   Remember when I played down that big gain on Monday because it really didn’t mean much?  Yea, there was a reason for that.  All this +1%, -1%, +1.2%, -1.2% price action is interesting to write about but ultimately meaningless.  So let’s talk about a market worry shall we?  I asked people to give me their top “market worry” last week and “valuation” came up a lot.  Which makes sense right?  We’ve come a long way, it’s only natural for clients to worry about lofty prices.   One of my outstanding teammates in London (frankly they are all awesome), Ross Yarrow, came up with an interesting chart that got a lot of positive feedback.   He looked at the S&P500’s trailing P/E at the start of every year since 1955 and then plotted its full year market return.  Here is the chart, take a look then come back.  No, you gotta go look, quit reading and go look.   Anyway, more diamonds than a Fifth avenue penthouse right?  As you can see, there are plenty of years where the markets trailing P/E was much higher and yet the tape still ended positive.  There are also plenty of years where it ended negative, yes, but it’s not like we are sitting on a 25 P/E.   We are at 18, only slightly above the median valuation (again on a trailing basis).  Around this valuation about 80% of the years saw positive returns.   So my friends, is valuation a huge concern?  Of course it is, and it will be for as long as humans trade stocks.  But if we look at trailing P/E’s for the last 60 years we can’t draw significant conclusions from it.   There are plenty of years where the market is cheap and fell, expensive and rose.  So, like all things market related, it’s just a piece of the puzzle, a puzzle that is constantly changing from year to year.   

After the open, the market remained as directionless as Arya Stark in Bravos (who else is excited for me to spoil everyone in Europe/Australia about Game of Thrones?  It’s almost like a normal feature of the recap).  We got yet ANOTHER batch of mediocre economic data as ISM Manufacturing fell for the 5th straight month.  Hike rates?   That’s as crazy as trying to seize King’s Landing from the sea (oh I’m fired up).  You know what all this endless mediocre economic data is going to cement?  Miserable grinding sideways price action where everyone is frozen in place.  I mean it’s like living north of the Wall for crying out loud (I probably have one or two more in me).   We spent the early morning heading lower but after an hour settled into a sideways slugfest.  2055-2060 was the course we plotted and nothing could stop the churn.  Winners NFX, NEM, MON, WIN, and KRFT.   Losers MAC, NRG, AAL, DAL, and UHS.   You think they can bring back Oberyn at all?  Is there any magic spell for blown up squashed melon head?  Has to be right?  I mean that crazy lady in red can pop out a smoke baby why can’t we get Oberyn back?  (I am excited to see his daughters’ quest for vengeance.  They look tough as nails)

The final part of the day brought nothing new, we are still wandering a wasteland like Danerys.  We adjust a few things here and there, hope for a brighter future, but really it’s just treading water waiting for the plot to unfold.  I’m off for Spring Break but after that I’ll be here for months on end ready to write about squiggly lines, sentiment, and why Janet Yellen is like Stannis Baratheon (I have a great recap planned for that).   Whatever happens over the next few weeks I will say this:  until you see new highs with immediate follow thru the market is suspect.   It’s quiet, data is weak, the Fed is talking hikes, and flashy sectors like Biotech are creaking.  As my boy Ben Affleck said in his brilliant interview scene…SUSPECT!   Final Score:   Dow -44bps, S&P500 -40bps, Nasdaq -42bps, Rus2k -8bps 

Volume was high.  Our desk was better to buy.  Buying in REITs, Health Care, and Chemicals.  Selling in Financials and Tech.  Shorting in Pharma.  News Highlights:

We’ll end tonight with a bungee jump.  Not your average ordinary bungee jump, no, this one features one rope…for two people.  Stupidity abounds!

Have a good night.