Right now, we are at minor support: 1090 on the S&P 500.
If we drop below this level, the correction will continue for another 60-120 points.
At least.
At most, we could see a return to the lows of last March: somewhere in the 875 range.
This is not entirely implausible.
Recall the bottom back in 2002-3. There we saw a return to the same levels three times.
It could happen again, and for one simple reason.
The Federal Reserve will be selling bonds for the near future at a record clip, not buying them as they did during the last year.
Combined with US Treasury sales, the bond market will be under constant selling pressure for years to come.
Interest rates will rise.
As interest rates rise, the value of stocks must pause until rates settle down.
That is the situation facing us now.
SUMMARY
We are still in a bull market, and the bull market will continue.
But, be careful about adding new positions in the equities area.
Consider shorting this market if it drops below 1090.
Evaluate short positions every three days.
TACTICS
- Money market arbitrage is still the best option for spread bankers.
- Extend the maturity of liabilities
- Find credit worthy borrowers.
- Tell the board that long rates will be rising
- Short rates will not be rising
- Credit spreads will be narrowing
- Consider fee-based income alternatives
