If you thought fundamentals, valuations and earnings growth matter the joke is on you.
In 2020 central banks have managed to do the unthinkable: Not only once again save investors from any damage in markets, but they intervened to such a degree that negative earnings growth is now the stuff of new record highs as well.
After all, never before have we seen indices vertically catapult to new record highs 2 years in a row on the cumulative reality of no earnings growth (2019) and negative earnings growth in 2020 with a multiple expansion of a near 50% in just 12 months with an unemployment rate of near 7% to boot.
As it’s all unprecedented it becomes a question of sustainability:
To get a visual appreciation of the vertical nature of the price action check a chart of small caps, up 17.5% on the year with negative earnings growth yet going vertical to new all time highs:
The chart apparently as vertical as the Citi Euphoria index:
If you are looking for precedence you will come up short as the vertical extension on some of these charts have no precedence.
Case in point, take a look at $RUT on a monthly basis:
Not only is price entirely outside the monthly Bollinger band (which is unprecedented) but the monthly 20MA oscillator is at disconnect levels that has set up for reversions of size in the past.
Something to keep in mind as markets are waiting for yet more stimulus into year end and the prospect of yet another Santa rally. Charts are stretched to the breaking point and reversion risk continues to build, hence from my perspective rallies remain selling opportunities for eventual technical reconnects. Ultimately these reconnects may offer long trade opportunities for new rallies or bounces, but for now these historic disconnects suggest the current trajectory to be unsustainable and a poor risk/reward proposition from the long side.
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