4,000.
That's out downside for the S&P 500 and it SHOULD provide support but that doesn't mean we can't overshoot to the downside by the same 160 points (weak) or 320 points (strong) that we expect for our bounces off the 4,000 line. An overshoot is not out of the question if people begin to panic and, don't forget, this is a market CORRECTION, not a pullback. A pullback assumes you will retake the previous highs while a correction assumes the previous traders WERE HIGH and now we are heading back to rational levels that can be supported by rational traders using rational valuations.
We've taken a very hard fall since the Fed Meeting last week, when we never should have gained 5% in the first place. Overall, the S&P is simply regressing from the 20% overshoot of the 4,000 line and, of course, if 4,000 is the correct middle of our range, then a 20% drop to 3,200 is not out of the quesition either – but we'll cross that bridge when we come to it. As you can see from this chart of S&P P/E Ratios, we're only just now coming into a "normal" range but those averages include the over-stimuluted averages of the last few years so I would say the lower, 10-year average is our best-case for settling in as reality once again begins to take hold.
This is why we pumped up our hedges last week, ahead of the Fed and that will help smoothe out the bumps along the way to 4,000 or even 3,200 but, if 4,000 doesn't hold, we will begin to add even more hedges and even to begin reducing our longs as there's no sense riding out another drop like the one we've already had. In order to find a proper bottom the things that are driving us there have to stop – or at least ease off:
- Is the Fed done tightening?
- Is Covid done infecting?
- Is Putin done invading?
- Are prices done inflating?
- Are jobs being filled?
- Are supply chain issues resolving?
- Is the Earth done warming?
Yes, some of these are…
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