• Comments for March 8, 2023

    Yesterday Powell indicated that the Fed would continue to increase the 10Y rates. The consequence was an instant market sell off,



    but the NHNL indicator is stubbornly staying above 0, indicating that there is a wide lack of panic. This is strange since higher rates would mostly affect small caps stocks.



    In any case, the Maclellan indicator continued weakening.



    As can be seen below, the S&P500 is overvalued here in terms of yield comparison.



    Current rates and EPS expectations should naturally drag the market below the Yellow mark shown below.



    It is interesting to compare this situation to the one of last April. Indeed, below is the valuation analysis of April 6, 2022. At that time, the EPS was 12% higher at 199.39$ and Interest rates were lower at 2.6%. Markets fell at that time due to a combination of higher rates and lower expected EPS. While falling they even became overvalued.



    Conclusions:

    In the long run, money will always follow higher yields, which means that the S&P500 will be naturally dragged lower until EPS expectations increase or the 10Y yields fall.