A Big, Fat ‘Hmmmm’


That’s my answer.

The question is when will a bout of fear roil the markets.

A former FX trader for Bloomberg, Mark Cudmore, went on record last Thursday about that. He said, "We’re debating the hour rather than the week."


Frankly, while there are certainly valuation measures to suggest stocks must come down, there are others to suggest they mustn’t.

So, according to Cudmore, it’s time to batten down the hatches.


Because the market allegedly "knows which way it wants to go." And now it just needs to pick a reason why.


Presumably, the market’s preferred direction is down because U.S. averages suddenly plunged Wednesday afternoon when the Federal Open Market Committee’s March meeting minutes came out.

Taken from those minutes was a feeling that the Fed is a bit concerned with lofty stock market valuations.


But I’ve been talking about the Fed talking about potential dislocation in asset markets for several months now. Granted, yours truly is often ahead of the game. [Insert pat on my own back.] But what traders gleaned from last week’s FOMC minutes shouldn’t be a surprise to anyone.

Nevertheless …

The "reason" investor fear will rise and stocks will decline any hour now is still to be determined, according to Cudmore.


And here comes the but …

BUT is the Fed good enough, able enough or free enough to actually start jawboning about overvaluations … precisely when asset prices are most extremely overvalued?

Cudmore’s comments suggest his answer is yes.

My answer is no.

The Fed is about managing perceptions. The Fed is not about calling tops in the market.

The Fed is simply trying to manage risk appetite in order to manage one of its three mandates: financial stability. Frankly, while there are certainly valuation measures to suggest stocks must come down, there are others to suggest they mustn’t.

Bloomberg recently addressed this with charts of the Fed Model (S&P forward P/E vs 10-year Treasury yield) and the Cyclically Adjusted Price-to-Earnings (CAPE) ratio.

The point I aim to make is this:

The growing fear of an imminent — counting down the hours — stock market decline due to unsustainable valuations is unwarranted … for now.

Overvalued stocks will implode precisely when investor fear is overcome by investor greed. That will look like a running of the bulls to outer space. And you can bet the Fed won’t be there to tell you when the bulls run out of oxygen.

The Fed is merely a bunch of flight attendants reminding everyone who gets on the plane that there are exits in the front, rear and at both wings. Don’t block the aisle!

Fears of a stock-market collapse are overblown … for now. But no oxygen mask will drop to let you know otherwise.

Clearly, I’m not measuring the time till collapse in hours.

But that’s not to say there won’t be a correction that materializes very soon. It is to say that a major, sustained bout of risk-aversion likely isn’t going to happen until a more dramatic blow-off rally materializes.

If you ask me how many weeks till that happens, I will answer with a big, fat "hmmmmm?"

Here’s the best I can do:

If stocks run higher (by 7% or so to roughly 2,550 on the S&P) during the next four weeks of trading … and if investors are feeling good about it … then I might start measuring in hours.

Here is a chart I’ve been tossing around since I wrote The Dovish Hawk Will Die April 7th. There I gave a date and price target for the S&P 500.

As a refresher, those targets were the euro at $1.0950 and U.S. stocks gaining roughly 7% by May 5.

If you’re wondering how, from current levels, stocks could shoot up another 7% or even 8% from here, consider these sentiment measures:

Only the put/call ratio, by historical measures, is conceivably warning of too many bulls in the China shop.

The Fed has to give us its safety demonstration. By now, most of you probably have it memorized. Just don’t let it keep you from enjoying it when stocks take (further) flight.

Do right,
JR Crooks

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“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…