Todd Harrison of Minyanvill.com talks to Yahoo!’s tech-ticker team about the five signals he sees as being those that fundamentally move the market.
1.Treasury yields: The 10-year yield settled at 3.50% on Friday, down from its recent rise to 3.78% on June 19, but still well above the January lows around 2.7%. Whether traders view this rise as a sign of “normalization” or incipient inflation will help determine the market’s fate, Harrison says.
2.Inflation vs. Deflation: Even Alan Greenspan knows the Fed faces a major challenge of needing to rein in excess liquidity before inflation takes hold, but not too soon as to risk choking off the recovery. Inflation is clearly a long-term threat, but Harrison says there’s 75% odds deflation persists for the near-term. (great piece on this by Morgan Stanley here)
3. New Supply of Stock: UBS’s $3.5 billion stock sale Friday is just the latest in a series of secondary offerings from banks. Some are worried about the pure supply and demand issues, but Harrison is more focused on a view the rally from the March lows was “synthetic” and “manufactured” by the U.S. government for the express purpose of facilitating these dilutive stock sales.
4.Technical Indicators: As detailed here, Harrison believes S&P 950 is the “most important level of the year” and believes the bulls have a window to make a run at that mark in the next week to 10 days.
5.Valuations: For all the talk of how “cheap” the market got in March, P/E ratios never got as low as at major market bottoms in 1990 or 1987. Furthermore, the market’s forward P/E is now close to levels that existed near the October 2007 highs, Harrison notes.