Scott Burrill - Market Notes

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It's Not Just The Fed

May 26, 2020

With the S&P 500 implying a potential move above 3000 this week, let's consider whether the market "should" sell-off or is on the verge of a breakout of its pronounced trading range.

An argument in favor of a sell-off points to high valuations; however, P/E ratios carry less weight in the current interest rate environment than the S&P 500 dividend yield of 2% and forward earnings growth. Of key concern, though, is if bonds sell off and yields go higher. The market is discounting low yields.

With the Fed's Balance Sheet growth, will the market breakout as the Fed keeps expanding its balance sheet, which has now eclipsed $7 trillion? Some pundits point to this as the only factor that matters.

No doubt, this expansion has been fuel in the tank for speculators. Still, Japan and Europe have expanded their balance sheets for over a decade with substandard results when compared to the massive rally in the S&P 500 over the same period and equal amounts of QE. Corporate earnings though, justified the US multiple expansion.

Despite the current headwinds and ongoing QE, Q2 2020 earnings and forward guidance will have to convince investors to pay above 3125, a key level).

From our key support level of 2187.50 to 3125 represents a near 43% rally off the bottom. Time to start looking at what a W-shaped market would entail.

For now, the Weekly Trend remains up.

It's a relatively active week for Economic Releases and Fedspeak.

While Earnings Season is all but finished.

Updated Index, Commodity, and Treasury Levels.

Have a great week.

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