U.S. stocks set for this year's biggest correction — Mr. Tetsu Emori, Morning Edition, November 6, 2019

　In the analysis by Tetsuya Emori, who employs a global macro strategy, on the morning of November 6, US stocks are at price levels that are far too high to be sustainable, making a stock-price correction inevitable.

I would like to present the details below.

【US Stocks Trading Strategy】
US stocks have reached new highs as the Dow Jones and Nasdaq indices updated their records. They remain solid, but the upside on this day seemed quite heavy. Clearly good news has been priced in. Still, there are no major catalysts driving a significant drop, and investors do not appear to be rushing to unwind positions. A relaxation of the US-China trade war is viewed as a positive factor, but given the frequent statements from the US administration that negotiations are progressing, there are also signs that this may not actually be the case. These issues are likely to be prolonged and will not be resolved quickly. At their core, the US-China confrontation stems from intellectual property rights, a high-tech sector issue. These are not things that will be resolved soon. There are also notes that pressure on Huawei and ZTE could be intensified. The current market seems far too optimistic about these issues.

On the valuation front, the S&P 500's P/E ratio is 18.90x in the near term and 17.16x in the long term, the highest levels in recent memory. I have never seen levels like this outside the tech bubble of 1999–2000. It is thus overvalued and unsustainable. The market is buying without understanding this. Historically, the YoY movements of S&P 500 EPS and stock price move in roughly tandem, but with the current price levels, their movements have diverged significantly. This unnatural and unsustainable state will not persist. A stock-price correction is highly natural.

The Fear & Greed Index (FGI), which I always monitor, has risen to 89. It is the highest level since 2018. It is a level rarely seen. After rising to such a historic level, let us remember how stock prices have moved. This level is rarely seen, so it will be memorable. This FGI is in the 'Extreme Greed' territory. If prices do not enter a correction, one would be surprised. A stock-price correction is inevitable, unavoidable. In the past, stock prices have corrected significantly. Also, shorts on VIX futures have expanded to the highest level recently. This indicates that investors' optimism has become extremely high.

From these, there is no doubt that the preparation for a price correction is "completely" in place. It would be unnatural not to think so. The rest is to wait for the correction. Some market participants point out that current prices are not overvalued, but that is clearly a position-trade. Objective data show only overvaluation. Technically, it is overheated. Now is a level to step away from the equity market. At this stage, maintain shorts and wait for the decline. If possible, increase shorts at the previous highs. Manage funds carefully and prepare for further upside. Personally, I have been selling into the move at yesterday's level.

We also maintain the view that November will bring this year's largest correction. This is something I have said since the start of the year, and I have no intention of retracting it. If the S&P 500 turns downward, there are supports at 3000, 2970, and 2935, so we will see whether these breaks occur. Beyond that, the 200-day moving average around 2890 will come into focus. If it falls below that, a correction toward around 2750, in relation to the ISM manufacturing index, becomes conceivable. If prices fall that far, I would consider long positions for next year. This view remains entirely unchanged.

Manufacturing PMI is turning upward. Also, China's OECD leading indicator has already bottomed and is in a recovery phase. These suggest the possibility of stock-price gains next year. Therefore, this decline could present an excellent buying opportunity for next year. For now, the stance is to wait for that buying opportunity. I would like to buy when prices are lower. From the movement of the S&P 500, we know that next year will rise. If possible, target below 2,800 on the S&P 500. In cases where three prior preventive rate cuts were made in the past, stock prices have risen reliably. However, the average gain in the President's fourth year is about 5%. Next year, stock prices are likely to rise, but the gain is likely to be below 10%, so it would be prudent not to have high expectations.

Written by Hayakawa

Tetsuya Emori's Real Trading Strategy