By: Kent Engelke | Capitol Securities
Bloomberg wrote yesterday the S & P 500 mid-cap index is the lowest valuation in two years and is below the five-year average on a forward 12-month PE basis. This should not be a surprise given the myopic recovery following perhaps the narrowest advance in history.
The SEC reported several weeks ago approximately 50% of volume is the result of algorithmic trading which is essentially the trading of derivatives and futures tied to equities. Another 40% is the result of indexing and ETFs, both of which are viewed as “kin” to algorithmic trading. Only 10% of the volume is the result of buying 100 shares of ABC company.
It is apparent from the data above that anyone who is utilizing traditional security and macroeconomic analysis, analysis of the typical stock is fighting a losing battle.
It is generally acknowledged that such strategies do not reflect any changes in the political or macroeconomic environment, changes which can potentially cause a shock. The selloff earlier in the month and the narrow based recovery is ample evidence of this view.
The only constant in life is change. Today’s environment will change, but the catalyst of this change will perhaps be the one that has not yet been discussed.
The marquee event of the week is today’s congressional testimony by FRB Chair Powell about the economy. Little new ground is expected to be broken with most believing he will reiterate many of his predecessor’s comments and outlook.
To write the obvious, if his comments are too economically bullish, equities could respond negatively given the potential impact on the bond market.
What will happen today?
Last night the foreign markets were down. London was down 0.04%, Paris was down 0.02% and Frankfurt was down 0.48%. China was down 0.34%, Japan was up 1.07% and Hang Sang was down 0.73%.
The Dow should open moderately lower ahead of Powell’s testimony. The 10-year is off 3/32 to yield 2.88%.