Trader: “The Facts Are Lining Up For A Nasty Correction In The S&P 500”
U.S. Equity Optimism Is Starting To Look Misplaced
It’s time to turn bearish on the S&P 500, at least for a few weeks. The benchmark U.S. equity index just made a fresh record high, but it’s unlikely to keep ignoring warning signs coming from elsewhere in markets.
After having been staunchly bullish global stocks this year, I turned bearish on Asia equities on Monday last week. That negative sentiment will now spread across the Pacific. Asia, and notably China, has led the 2019 global stocks rally, and similarly has the capacity to lead a correction.
There’s not one single looming catalyst that will send equities reeling. The problem is that almost every factor is starting to look like a marginal negative. The positives from Fed dovishness, a solid earnings season and hopes of a trade deal are all generously priced in. Where’s the good news going to come from going forward?
Companies’ guidance hasn’t been encouraging and earnings estimates for later in the year continue to slide. The S&P 500 has a blended 12-months forward price-to-equity ratio of 17 versus the 10-year average of 15. Such a substantial premium is ripe for disappointment.
The data out of Asia over the past week has been terrible. Tuesday’s PMIs out of China emphasize that the market may have got over- optimistic on how quickly the economy can accelerate: All the PMI prints disappointed — private and official, manufacturing and services.
Dollar strength is another marginal negative. As is the surge in oil prices. This week’s lengthy holidays in the world’s second- and third-largest economies, China and Japan, don’t help. And, of course, May is historically a tough month for emerging markets.
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