The S&P futures are down 11 points and are trading 0.4% below fair value. That disposition simply doesn't match the bullish bias that has dominated the stock market this month, yet there is some symmetry this morning in that understanding.
The point resonating in most market narratives is that the stock market has gone too far, too fast, and has run headlong into a wall of valuation concerns.
That perspective is joined with reminders that the S&P 500 is trading nearly 10% above its 200-day moving average, the Dow Jones Industrial Average has scored 10 consecutive record closes for the first time since 1987, and the S&P 500, at 17.7x forward twelve-month earnings, is trading at a premium to its 5-year, 10-year, and 20-year historical averages, according to FactSet.
Also, it just feels like the market has gotten ahead of itself, discounting a tax reform plan that is still in a formative and contested stage, and trading nearly every day with a rose-colored lens on matters both foreign and domestic.
The market has basically gone straight up since the end of January, with the Dow Jones industrial Average up 4.8%, the Nasdaq Composite up 3.9%, the S&P 500 up 3.7%, and the Russell 2000 up 2.4%.
What we have this morning, then, is a bit of straight-line depreciation, if you will, driven by a smattering of convenient excuses to take a step back for a bit.
- There are reported misgivings about the scope, and timing, of a tax reform plan (when haven't there been?)
- Some bank earnings reports out of Europe today weren't so hot (not a real surprise)
- There is some angst about the upcoming elections in the European Union (that's been the case since our own election)
- Oil prices have fallen (-1.0% to $53.91) amid inventory concerns related in part from the stepped-up production of U.S. shale producers (gee, who would have thought that shale producers would produce more with prices going up and OPEC cutting back?)
- President Trump is accusing China of manipulating its currency (not a new perspective)
A pullback is in order. There will be one at the open. What happens after that will be the more interesting dynamic since just about everyone under the sun coming on CNBC says they are waiting to buy on a pullback.
That inclination might not be satisfied with a drop today, or even over the course of the next few days, yet it's a mentality that certainly seems to be sitting there as a potential source of support.
Where things will really get interesting is if the market rolls over after "everyone" steps in to buy on the sizable pullback they have been waiting for.
That will be a discussion for another day.
For this day, know that the market is going to open weak ahead of the New Home Sales and University of Michigan Consumer Sentiment reports at 10:00 a.m. ET, and that it will be opening on a weak note because it is due for a pullback after an incredible run that has been driven by its own share of convenient excuses for keeping the post-election rally going.
Those excuses are becoming some tired excuses, though, which is why the lack of detail and action on all of the talk of policy proposals is becoming the most convenient excuse of all to take some money off the table after a straight-line move.