As the summer winds down and more people take vacation, the U.S. stock market is on a tear to the upside. Yesterday the E-mini S&P 500 futures (ESU14:CME) traded above the magical 2000 but failed to finish above. As I said yesterday, the S&P futures will have to cross above and below the 2000 mark several times before it starts to move higher again.
The S&P (^GSPC:SNP) again shrugged off the geopolitical worries of Ukraine, the ongoing conflict in Gaza, possible sooner-than-expected rate hikes, and an economy that can’t seem to gain traction. It made its 30th new contract high in 2014 and is now up over 8% on the year and up 38% on the last 20 months. While many market timers and economists continue to remain cautious and compare it to the 1999-2000 tech bubble, zero borrowing cost and stock buybacks continue to propel the stock market higher. We remember very well how the tech bubble ended, but we also see that comparisons between 2000 and 2014 have not helped the short sellers.
In the summer of 2000 the big game in town was the day trading stock rooms. At the CME, traders from the floor would run into 19- and 20-year-old traders bragging about how much money they made buying tech names that no one had ever heard of. They would buy at $10 and sell at $90 a few days later. Professional traders and order fillers and local traders in the S&P pit knew exactly who these young untested traders were; they wore sandals, T-shirts and shorts to work. I remember 1999-2000 like it was yesterday and I knew it was not going to end well. These young untested traders knew how to buy in a bull market but they didn’t know how to sell and get out once the markets turned south. As the saying goes, the market giveth and the market taketh away.
According to FactSet the stocks in the S&P were trading at 23.1 times their 12-month earnings on March 31,1989. As of last Friday the S&P was trading at a price-to-earnings ratio of 30.9 compared with the 10-year average of 13.9. The biggest stock in the S&P 500 today is Apple Inc. (AAPL:NASDAQ), which had a forward P/E ratio of 14.7 as of Friday’s close. The S&P 500 rose nearly 27% in 1998, marking the fourth consecutive year the index gained more than 20%. In 1999, the S&P rose 19.5%. On the floor back then no one could believe how the markets kept going up, but unlike our stock day-trading friends, most S&P floor traders knew the rally would not end well. There was a warm, fuzzy feeling about the S&P back then, but things changed in 2000 when the NASDAQ turned lower and has taken 14 years to return to those highs.
Many younger traders today were not old enough to to experience what happened in 2000 but for those that held stocks or remained long the turn lower was devastating. Many of the high-flying tech companies that had no valuations went out of business. (Remember Pets.com?) Things changed so fast if you hesitated, you were out. I do not think today’s stock market looks anything like 1999-2000, when there was an abundance of optimism. Today’s 5-year bull market is loaded with skepticism but that has not stopped the march higher. I don’t know when the S&P is going to turn lower, but I still feel confident that, barring a terrorist attack or similar catastrophe, the S&P will continue higher. Fighting it has not worked.
Overnight, the Asian markets closed higher, while 7 of 12 European markets are trading higher. Today’s economic schedule includes MBA mortgage applications, the petroleum report, a 5-year note auction and earnings from Seadrill (NYSE: SDRL), Tiffany & Co. (NYSE: TIF), Brown Forman (NYSE: BFB), and Brown Shoe Company (NYSE: BWS).
Our view: Many traders I speak to cannot believe how quickly ESU14 reversed, but I am not surprised. There are two sides to a trading card but the only one that really works for me is the blue side. I know at some point the markets will go down but until we hear the Fed say they are raising rates I see no reason to fight the upside. The money trade lies in waiting for the S&P to sell off and back-and-fill and getting long again. You can take it from there …
- In Asia 11 of 12 markets closed higher: Shanghai Comp. +0.11%, Hang Seng -0.62%, Nikkei -+0.09%.
- In Europe 7 of 12 markets are trading higher: DAX -0.10%, FTSE +0.07%, MICEX -0.17%
- Fair value: S&P -2.59, Nasdaq -0.85, Dow -22.20
- Total volume: 859K ESU and 4.2K SPU traded
- Economic and earnings calendar: MBA mortgage applications, the petroleum report, a 5-year note auction and earnings from Seadrill (NYSE: SDRL), Tiffany & Co. (NYSE: TIF), Brown Forman (NYSE: BFB), and Brown Shoe (NYSE: BWS).