Hello investors,
Last week, the markets were driven by inflation and interest rates fear. OId story, old music, yet investors were freaking out. It amazes me how irrational the market participants are. It becomes all worse if we look at what we know so far. The interest rates are currently at around 5%, yet the economy is booming, companies are beating expectations, and the labor market is still strong. There is no need to cut the rates. But, Wall Street, addicted to a low-interest rates drug, demands a new dose of low rates.

"Relax, folks, Jerome Powell just promised no rate hikes!" That single sentence sent the market into a two-day celebration mode. He even commented about slowing down the Fed's balance sheet unwind. But did he sprinkle enough magic dust? Is it sufficient to keep the ten-year under 4.7%? If not, brace yourselves for the wild ride to 5.0%, a territory that could usher in more market turbulence than a bull in a china shop.

This week's earnings were a rollercoaster of emotions. While most companies dazzled, a few stumbled over their shoelaces with missed estimates. We're now eyeing a 5% growth in earnings compared to last year's figures. Lilly strutted with a stellar report, AMD took a dip despite an average performance, and Apple? Oh, they're playing financial Jenga with a massive buyback of their shares, aiming to beef up their earnings. Talk about spinning plates in the finance circus!

Hold onto your hats because another 55 S&P 500 companies will spill their financial beans this week, marking the almost-end earnings season chaos. We've weathered two lukewarm reports on the economy's current status, with last week's GDP report resembling a deflated balloon and Friday's jobs report landing with a thud. But as long as earnings keep sprouting like weeds in a garden, we might have a shot at scaling even higher peaks in the market's mountain range of dreams.

Then I was thinking about the rollercoaster and realized it is not the market participants! They can't be that stupid! Or can they? I think this market is driven around by algos reacting to the news. It could be seen during Jerome's speech when he said "no more hikes"; the market skyrocketed, followed by his remarks of "higher for longer" crash. All in the same hour. No sane person out there can do that. And if algos make the market a casino, all we can do is adapt (while others whine about it). That's why I created my indicators (and I am still working on them) to get out of bullish trades when the sentiment changes. But I can't react to a one-hour dose of craziness.

Market sentiment

The S&P 500 has now leveled off into a sideways trend around the 5,000 area. Its support level is now 4,950. A break below that would be a continuation of the downtrend. The next level of support is at 4,703. Resistance is at 5,127 (50-day MA). The forward PE ratio of this index dropped from 20.0x to 19.9x this past week. Its five-year average is 19.0x, and its ten-year average is 17.7x. It got as high as 23x in early 2021 when rates were near zero. The S&P 500 would have to pull back to 4,700 to return the forward PE ratio to 19.0x. It is still a vulnerable chart.
Friday's price action was driven by labor market data showing a slowdown. Any sane person would be worried, yet the markets rallied, seeing it as a sign of a slowing economy, which would change Fed policy and cut rates. But it helped the chart above, which is now bullish. It is a weak bull but improving (and yes, it can all change as early as Monday).

Market Score

The market has a score of 57.

What does this mean? The markets are now in fair value territory (on the high side but fair). With crashing volatility, this could be a good buying opportunity.

My signals now require shifting from defensive to bullish positions, so last week, we sold our protective and cash equivalent holdings and moved back to SPXL, SSO, or SPY positions.

Volatility Metrics

Volatility continued creeping up but then crashed significantly last week. We saw a whopping 15% volatility crash! The new score is 48.17%. The rate of change is now at 10.58%. Along with the market metric above, this is a clear bullish signal. How long will it stay bullish? That's an unknown future, but the volatility gauge will tell me in time to get out from a bullish position before the market changes its mind and crashes again.
What does this mean?

This indicates that volatility is declining again, and the market participants are becoming bullish but still cautious. This seems to be an early bull stage and an excellent opportunity to jump in before others become YOLOing again.

There are the following potential scenarios:

1) Volatility starts rising, the score rises, and the market rallies.
This will be the most dangerous scenario. It will indicate that the correction is imminent. In this market, we will save cash (parking it into ICSH and SGOV), not buy new stock positions, and keep trading options, but we will not be scaling up our trading.

2) Volatility increases above 55%, the score still rises, and the market still rallies
This indicates that it is time to go bearish and defensive. Let others keep propping the market, but we will reverse our trades into neutral to bearish trades. We will add protective positions. Our options trades will be placed as far away from the market as possible, and we will trade Iron Condors.

3) Volatility keeps increasing above 55%; the score starts dropping, and the markets stall, reverse, or drop.
This will be the time to go full defensive and bearish. We will likely release cash (selling ICSH and SGOV funds to increase cash) to prevent margin calls. Our options trading will be fully bearish (selling calls or call spreads), and we will buy 2x or 3x leveraged bearish ETFs (sell SSO, SPXL, and buy VIXM, XLU, or stay in cash. We will buy protective puts, trade collars, or deep ITM-covered calls to protect our dividend stocks.

4) Volatility crashes, score crashes, and the market crashes or reverses.
This will be the time to go aggressively bullish again. We will liquidate all bearish trades and rotate them into bullish ones, such as buying SPXL and SSO and adding stocks to our portfolio again. Our options trades will be bullish again (selling puts, selling put spreads, or trading Iron Condors).

Today, we are in scenario #4. We are adding SPXL, SSO, and QLD funds to our portfolio (Defensive and Strategic Growth Positions). Our options trades are aggressive, but we are not scaling them up yet. We are not buying new stock positions yet and are saving cash in ICSH and SGOV.

Market Outlook

EARNINGS SEASON IS NOW ALMOST HALF OVER! For Q1 2024, with 80% of S&P 500 companies reporting actual results, 77% have beaten their earnings estimates, and 61% have beaten their sales estimates. The estimated (year-over-year) earnings growth rate for the S&P 500 is now 5.0%. This is another big jump from last week’s 3.5% growth estimate! Tell me again why we need to cut the rates! We were at 3.2% four weeks ago. 5.0% is the actual growth rate for the quarter, it will mark the third-straight quarter of year-over-year earnings growth for the index.

The S&P 500's estimate for Q1 is now $55.64 per share, up from $55.25 nine weeks ago and up from $53.33 per share for the S&P 500 aggregate one year ago. The current revenue growth estimate is 4.1%.

The S&P 500 forward PE ratio increased to 20.0x this week. This is still above the upper band of forward PE ratios but is coming down from its bloated 22x level. We got as low as 15.5x in October 2022 and started 2023 at 17.0x. This forward PE ratio has dropped from 23.5x since the beginning of 2022. The five-year average is 19.1x. The ten-year average is 17.8x. The net profit margin for the quarter is expected to be 11.7%.

56 S&P 500 companies will report this coming week!

The trailing 12-month P/E ratio is 24.7, well above the 5-year average of 23.2 and above the 10-year average of 21.3.

For Q1 2024, analysts are projecting earnings growth of 5.0% and revenue growth of 4.1%.
For Q2 2024, analysts are projecting earnings growth of 9.6% and revenue growth of 4.5%.
For Q3 2024, analysts are projecting earnings growth of 8.4% and revenue growth of 4.8%.
For Q4 2024, analysts are projecting earnings growth of 17.1% and revenue growth of 5.4%.

For all of 2024, analysts are projecting earnings growth of 11.0% and revenue growth of 4.9%.

For all of 2025, analysts are projecting earnings growth of 9.5% and revenue growth of 5.8%.

The market is now homing in on the 2025 and 2026 estimates. The consensus analyst’s 12-month target price for the S&P 500 is 5,572. The consensus analyst’s earnings estimate for the next four quarters is now $252.48. I am currently at $253. I am keeping my multiple at 19.0x for now. (The ten-year interest rate is 4.58%).

(2024) $253 X 19.0 = 4,807 S&P 500 Target Price

My current 3-6 month target price for the S&P 500 is 4,807. This gives the S&P 500 an upside potential of -6.30%. The gap is narrowing as the market corrects. The market was significantly overvalued before this correction began. We need to see a more significant pullback or material earnings increase (unlikely) for higher upside potential.

(2025) $288 X 19.0 = 5,572 S&P 500 Target Price

The consensus estimate for the next four quarters is $288.00. I am keeping my multiple at 19x this week. My current 6-12 month target Price for the S&P 500 is 5,572. This represents a +8.70% upside potential, which is below average.

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Disclaimer: All information, analysis, and articles in this email are provided for educational purposes only. Nothing herein should be interpreted as personalized investment advice, as I do not recommend buying, selling, or holding any securities or positions. This email is available "as is" without warranty or guarantees of its accuracy, completeness, or currentness. You do so at your own risk if you rely on this email or any information. I do not hold myself out as a financial advisor, and nothing herein is a solicitation for any fund or securities mentioned. Although I may answer general questions about the information, I'm not licensed and registered under security laws to address your personal investment situation. Past performance is not indicative of future returns. Any financial decisions are the sole responsibility of you, the individual.
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