February 6th, 2013

The Secular Bear Market and the QE’s

imageBarry Ritholtz recently asked in his blog, “Is the Secular Bear Market Coming to an End?“. He goes on to say “Here we are, a few weeks away from the start of the 14th year of the secular Bear market that began March 2000. The question on more than a few peoples’ minds has been whether or not it is reaching its end.”  Ritholtz goes on to give his definition of the term “secular bear market” and offers prerequisites required before the bear market can end.  In short, he concludes

“Regardless of your answer to our broad question, there is one thing that I believe to be clear: We are much closer to the end of this secular cycle than to the beginning. Many optimists — most notably, famed technician Ralph Acampora — believe the secular bear market has ended. Even skeptics have to agree that we are more likely in the 7th or 8th inning than earlier stages of the game.”

and offers the following chart:

Secular Bull and Bear MktsSource: Haver, Factset, Robert Shiller, FMRCo. Monthly Data, since 1871.

[Some of Ritholtz’s comments and image match those of found in Fidelity Investments Viewpoints of a few days earlier.]

Helping to prevent losing objectivity to my fundamentally optimistic nature has been a long-running discussion about how the exit from the Secular Bear Market that has hampered the market’s advance for the past 14 years might ultimately look like.  The discussion began with a study of market behavior over the past 50-year that serve as the basis for the Market Momentum Meter, one of the principal topics of my book, “Run with the Herd“.

The data reveals that the market has fluctuated around a line that’s risen at a fairly consistent 7.5%/year rate since 1939.  The upper and lower boundaries of fluctuations around that line are +/- 44% on either side of that upwardly sloping mean distribution line.  The upper boundary was touched at the beginnings of the 1970 and 2000 decades, both of which were also the start of what turned out to be Secular Bear Markets.  The lows of both those Secular Bear Markets were at the lower boundary of the range.

S&P 500 1939-Present

Having touched the lower boundary in 2009, I wondered whether the exit from the 1970’s secular bear market might serve as an analog to the exit from today’s secular bear market.  “What the market trend be if it followed exactly the 1979-82 exit?”    I’ve written about the exit here several times over the years, the most recent being last year on June 4 in “Revisiting 1970’s Secular Bear Market Exit … Again” [that post includes links to previous references to the Secular Bear exit going back to October, 2008.

It turns out that the current Bear Market and the one in the 1970s is that inflation and economic stagnation (then known as “stagflation”) had one major difference.  Inflation had hit an annual rate of 13.5% when Jimmy Carter appointed Paul Volcker to head the Fed in August 1979.  He immediately began attacking inflation by raising interest rates to unprecedented levels of 20% by June 1981; inflation soon began easing and interest rates began to fall.

The current Bear Market was diametrically opposed, especially since the Financial Crisis and bursting of the housing bubble, with the fear of deflation with the crash in housing and real estate values.  To fight the “Great Recession” and ineffective or insufficient fiscal policies, Bernanke launched Quantitative Easing monetary policies which brought interest rates to low levels not seen since World War II.  The following chart shows the different impact of the two monetary policy courses:

1980's Analog and QE's

The 1970s Secular Bear Market exit analog may have been a good benchmark against which to measure the prospective current Bear Market exit.  At this late date, I would have to conclude that not only have low interest rates helped the economy avoid a depression, they may have also helped the stock market exit more quickly from the Secular Bear Market.  Rather than reversing and, thereby, extending the secular bear market’s life, so long as Bernanke keeps rates low, one can be confident that the market will soon exit the Secular Bear Market, cross into all-time new highs and, with luck, begin the first bull market advance since the 1990s.

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January 31st, 2013

Anatomy of the “Bull Market”

imageEveryone right now is trying to figure out how vulnerable the market is to a serious correction as it approaches its previous all-time highs.  For example, CNN recently posted a piece entitled “Bull market winding down. Don’t panic” in which they overlaid onto the 2009-2012 S&P 500 the template of the market’s traditional psychological life cycle.  [FYI, I’ve used that template myself in many earlier postings.  For example, two years ago in Two Views of the Same Image, some had voiced fears that investors were “euphoric” and that meant that the market was approaching a peak followed by a significant downturn.]

In the recent CNN article, Laszlo Birinyi Associates suggested that the bull market “likely entered its final stage last summer. So far, the S&P 500 has climbed almost 8% during this period of ‘exuberance’.”  Birinyi, says this stage of the market’s life cycle is when “fireworks” happen….. when all the people who have been reluctant and hesitant to invest in the stock market start realizing this isn’t the New York City subway system.  There’s not going to be another train coming so they better get on board.”

Four stages of Bull Market

The CNN article concludes that some of the best gains are to be had in the market’s final stages as everyone begins to pile onto stocks.  This year, that run could be even more impressive as the fixed income bull market ends and investors sell those investments in favor of equities.

When I look at the S&P Index over the same period, I don’t see some rather arbitrary demarcations of changes in market psychology.  I see another interesting pattern of market behavior (click on image to enlarge):

S&P 500 - Steps

At the risk of being labelled an Elliottician, that is a practitioner of Fibonacci patterns and Elliott Wave Theory, I see that this bull market looks like a stair-step affair with each successive leg of the bull run lasting only 50-70% of the previous leg and the % change of each leg being only 50-80% of the immediately preceding one.  The intervening steps down were less regular; excluding the 2011 correction that was amplified by the European debt crisis, each correction leg lasted approximately 60 calendar days and each (again, other than 2011) was 50-70% of the prior one.

Call it a stair-step or ever more tightly wound spring …. no matter what the analogy, the trend is unsustainable.  In the next correction down leg down could be the last of the series.  Each of the four previous corrections were between 50-70% of the immediately previous upleg.  If it holds true again, a correction beginning soon could carry the market down to approximately 1410-1415, another pivot at the bottom boundary trendline.

Looking at the psychological terms in the Birinyi chart above, I can’t come to grips with calling today’s market psychology as “exuberant”.  The reason the market saw an unusually large cash inflow in January was because they’ve been nearly non-existent since 2007.  Even though we aren’t hearing much today about the inadequacy of job creation, consumer demand is still weak and businesses still hoard their cash fearing a weak economic future.  Actually, the market rose 225% since March 2009 not because of a growing economy but only because of how far it had fallen from 2007 to March 2009.

Before there can be market “exuberance” there needs to be exuberance concerning the world economy, a condition that may be near but clearly hasn’t arrived yet.  After the coming correction, psychology surrounding the economy might have improved sufficiently to allow the market to quickly maneuver around the tip of that coiled-spring and make a run at and finally, after 14 years, cross above the all-time highs.

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October 25th, 2012

Maria Misses the Big Picture

Maria Bartiromo lambasted Greg Smith’s controversial book and his criticism of the culture at Goldman Sachs.  But, if you read the transcript carefully, you see that it was actually an op-ed piece about her placing the blame of the low participation on the part of individual investors in the market these days squarely on Wall Street practices.

She may also have been trying to place blame for the drop in the viewership of CNBC also on the absence of individual investor participation and, by inference, at Wall Street’s shenanigans.  In a recent NY Daily News article quotes CNBC execs as saying that

“the cable business channel are “freaking out” because viewership levels are down essentially across-the-board, particularly with its marquee shows, “Squawk Box” and “Closing Bell”. Their biggest attractions have become their biggest losers.”……..


The network has already moved to revive “Closing Bell.” On Friday, CNBC announced it had poaching “Cavuto” exec producer Gary Schreier to take the helm of Bartiromo’s show.  According to the Nielsens, “Closing Bell” is also seeing its third straight quarter of decline.


From April 2011 to April 2012, the show is down 16 percent in total viewers and 11 percent in the 25-54 demographic.

“Maria gets good interviews, but she’s also not creating enough buzz,” says the insider.

It should be noted, that the Murdoch empire owns the NY Post, a Daily News competitor and also has the Fox Business News Network and delivers “Your World with Cavuto” on the Fox News Network.  But back to Maria’s rant.  In her op-ed piece, she claimed that

“there are issues in the [Wall Street] community.  Why else has the retail investor left the party?  trust has plummeted between the financial crisis, flash crashes, trading glitches and debacles like the facebook ipo, it has taken a toll on the retail investor.  bottom line, clients should be the priority, integrity should be the goal even at the expense of profitability, so books like these will not help.  it’s time for wall street to work overtime if and when that trusts returns, we all know that will help a lot more than just wall street.”

Where has Maria been for the past 10-12 years?  Has she had an opportunity to do more than merely repeat the day’s screaming headlines to actually see how truly abysmal the market’s performance has actually been during the secular bear market of the past twelve years?  True, there has been extreme, volatile long-term moves of 100% to the upside and 50% to the downside.  But in the end, the market is just about where it was in 2000.  The absence of individual investors probably has more to do with the Afghan/Iraq wars, the housing/financial crisis and failed Congressional/Executive leadership than it does Wall Street’s failures or excesses. (image from post several days ago, Important Stock Market Supports)

With the market failing to deliver any positive news, why should the small investor participate?  Why should they watch CNBC?  And, I might add rather selfishly, why should they read this or any other blog?  My hope is the the market does successfully break across the all-time highs not only because my investments will again be able to easily show some significant gains but also because my readership will jump and I’ll be able to sell more of my book.

Don’t loose hope; keep your chin up.  Contrary to the bearish views of many observers and Maria’s rather narrow view of Wall Street behavior being the culprit, the book’s final chapter is entitled “Where to from Here?” and it offers a fairly optimistic view of the market’s direction to 2020.

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October 23rd, 2012

Important Stock Market Supports

I must confess that I’m disappointed by both Romney’s lack of fire in his belly during last night’s debate and in the market’s negative reaction to that performance.  I’m one of the crowd who was looking for a bounce rather than a swoon as we moved on to the election and for several weeks after a Romney victory.  My market optimism was based on the belief that a Republican victory in both the White House and Congress would a big risk factor overhanging the market (whether fairly or not) as far as economic growth and would also reduce the risk associated with the country’s falling over the fiscal cliff at year end.

This morning’s reaction forces me to go reevaluate the game plan.  Perhaps the market will slip over the edge before the economy does.  But then again, there are many potential support levels to stop the fall …. albeit after some major damage to stock prices and portfolios (click on image to enlarge):


Those supports are indicated on the chart:

  • The lower boundary of an ascending channel that begin in late-2011.  Perhaps, not coincidentally, that trendline actually stretches back to the 2009 Financial Crisis Crash low (see chart below) and should, therefore, be considered an extremely important and strong one.
  • Three slow moving averages that all happen to currently be ascending
  • A horizontal trendline at approximately the prior 2012 low for the year

Unfortunately, however, my proprietary Market Momentum Meter will turn red suggesting that a move into cash is advisable based on similar situations in the past.  If the decline continues at the current rate, it will be similar to the rapid decline in 2011.  The recovery from that correction was fairly quick and dramatic so many investors, including me, were whipsawed and are still trying to recover.

Some look at the long-term chart a see the market back at the top of its 12-year secular bear market tradition range and, consequently, see the beginning of another major market crash (i.e., decline of 30-50%):

One usually bearish pundit recently wrote the following typical view of an impending market top,

“Cyclical bulls follow cyclical bears, so from those panic ashes a new cyclical bull was indeed born.  And coming from excessive lows, it would more than double the stock markets again.  Over the 3.5-year span running to just last month, the SPX blasted 116.7% higher!  And that brings us to where we are today, what is almost certainly the third major bull-market topping witnessed in this secular bear.”

Rather than the proximity to the top of the secular bear market range, my focus will be on that ascending trendline from the 2011 and 2009 lows, currently at around 1400.  A cross below that line would be a clear indication of more declines to come.


August 21st, 2012

Stock Market Recover Sidetracked by European Sovereign Debt Crisis

I think one of my most prescient posts was entitled Housing and Finance: Two Superimposed Crises and Bear Markets of September 17, 2010, almost exactly two years ago and just before the last mid-term elections.  The market had already bottomed the previous March and were breaking above what I saw as an inverted head-and-shoulder interim bottom.  As noted in the post,  there appeared to be the beginnings of a bottom in the housing market due to once-in-a-lifetime affordability.

Specifically, I envisioned the market being victimized for the first time in history by two economic crises: financial crisis hitting banks and other financial enterprises plus the housing crisis hitting consumers.  I suggested that before the market can advance to new highs, both these industry groups would have to bottom and begin moving higher.  The keystone of that post was the following chart on which I attempted to visually superimpose the impact of those two crises on the stock market:

Here we are, two years later, with the market having ground 24.6% higher from 1126 to 1420 today.  I wrote then:

The reason the market appears to be bottoming again (the inverted head and shoulders) may perhaps be that housing is beginning to bottom and turn also. The number of foreclosures continues to rise (although at a lesser rate than last year) and the improved affordability index (historic low mortgage interest rates and closeout prices of houses) has not yet stimulated a pickup in the housing sales turnover. But a pickup may be around the corner [triggered by an up-tick in interest rates?]. Without a turnaround in housing, the stock market recovery will be short-lived.

Unfortunately, I didn’t have sufficient courage to invest in homebuilders and missed out on the Industry Group with one of the biggest moves over the past twelve months, Homebuilders, at 75%:

We thought our Financial Crisis had been contained by the Fed’s first round of Quantitative Easing and that banks would begin their recovery however the effort was sidetracked because of the European Sovereign Debt Crisis beginning towards the end of 2009.  The recovery in the stocks of the country’s larger banks began to falter towards the beginning of 2010 and only now has begun to show signs of renewed life:

The “herd’s” big money flow again beginning to be directed into financial stocks gives hope that, absent a new major crisis (although our own Federal debt and budget debate is still looming on the horizon), the market will be able finally to continue to the previous all-time highs and ultimately break the grips of the 12- going on 13-year secular bear market.  A cross of the XLF above 16 will trigger for me the another clear indication that financials will begin leading the market higher.

It’s been a long, frustrating two years.  We’re facing another national election, this one even more important than the last.  Continuing to look at all the negative news continues to make our investment lives feel dismal.  Seeing the possibilities of some positive news for a change opens the mind to a totally different stock market future than the one we have become accustomed to.  I may be nothing more than an incurable optimist but that’s the best way to remain committed to the stock market and, ultimately, long-term financial well-being.

June 4th, 2012

Revisiting 1970’s Secular Bear Market Exit …. Again

There are two kinds of investors: those who try to predict the market’s future direction from what they understand to be the truth of today’s events and those who try to understand past events and project them as models for what the future might hold.  In other words, those who view the market in fundamental economic terms and those who see the market in terms of supply and demand for stocks.  As you might have surmised, I belong in the latter camp.  I gravitate to the technical approach and look to the past for analogs that might guide me in looking at possible market direction today.

For quite some time, I’ve seen similarities between the end of the 1970’s secular bear market and this generation’s secular bear market that began with the Tech Bubble Crash.  I’ve been calling it my “Reversion to the Mean” chart.  For example, in “The Magic Number is Actually 7.5% per Year” from October 11, 2008, in the depths of the Financial Crisis Crash, I wrote:

“The good news is that …. the Index came within 6% of the bottom boundary (intra-day 839 low vs. 789) boundary); we should be near very the bottom. The bad news is that projecting forward to the end of 2009, the lower boundary increases to only 858, or still below Friday’s close.

There will be bounces but, in all likelihood, it will be a long time (several years) before the Index touches 1400 again. Unfortunately, the “buy-and-holders” are going to feel extremely frustrated. Market timing will be extremely important. You’ll have to trade gingerly taking advantage of recovery moves. You’ll have to be patient and not expect a robust Bull Market to return anytime soon. Shed poor performing stocks and, as market weakness appears, become defensive to conserve your capital.”

And then on Obama’s Inauguration on January 17, 2009, I wrote:

“Granted this is a bad recession; some even call it the beginnings of a depression. It’s not only here but it’s worldwide. Has the market fully baked in the economic distress? Has the market adequately reflected the $trillions that has been created to stave off further effects? Will the market deviate from the mean more than the 9.98% of 1982 (making today’s low at least approximately 725)?

Without getting political, I thing that investor psychology (as well as that of the general populous) see’s the Inauguration as a new beginning and psychology is the other half of the market (economics being the first). Ronald Reagan took office in January 20, 1981 and the country sighed a deep sigh of relieve as Jimmy Carter left office leaving behind the high oil prices and high interest rates; the hostages were released in Iran that same afternoon. Barack Obama is being inaugurated and perhaps we’ll be as lucky.”

Then, on May 2, 2011 in “Reversion to the Mean-Redux” I wrote:

“Following this track literally [superimposing the exit from the 1970’s secular bear market exactly on to recovery from the 2009 Financial Crisis Crash] means that the market could be heading into some murky water. We may soon stall out, retreat again and not see the current level again until sometime in 2013. If the recovery time frame over which the economy and the market took to come out of the 1970′s secular bear market were followed precisely again, then a new market high won’t be seen until around the beginning of 2015.

I have no idea and care little today to know what underlying fundamentals will be used to explain in the future the market’s then behavior. “Reversion to the mean” merely establishes the boundaries within which the consequences of all these underlying dynamics might ultimately be realized.”

Finally, this past January 30 in “That Old 1978-82 Analog Again” I wrote:

“On the one hand, we might actually be escaping the Bear Market sooner than I had originally anticipated but, on the other hand, the analog may still be in play and we’re looking at a possible reversal for the remainder of 2012 in order to get back closer to the analog.

I guess if I had to choose between swallowing my pride at having missed a “forecast” and accepting the upside break out or meeting the forecast but delaying the opportunity of seeing a higher market again ….. I’ll live with having missed a forecast.”

I guess we didn’t dodge the bullet since we’re just about back to where we were when the above was written.  But now, six months latter, what does the analog look like now (click on image to enlarge)?

The black line is the actual index and the blue is the projection based on the exit from the 70’s secular bear market.  The 70’s secular bear market low point was in September 1974 and a new high wasn’t established until 1980, over 5 years later.  The analog assumes that the low of the current secular bear market was the 2009 Financial Crisis Crash; overlaying the 1970’s track beginning at that low point produces a new high sometime in 2015.

In the Weekly Recap Report sent to Members yesterday, I indicated 5 possible support areas on which the market could pivot and begin another leg higher.  However, the sixth lower level is the bottom boundary of the “Reversal to the Mean” channel indicated in the chart above.  While the 1970’s analog foretells of a nice bull market to 2015 and beyond it also implies that the current correction could stretch all the way down to around 1000 in the S&P 500.

The similarities between the exit from the 1970’s secular bear market and today are many.  What we do know is that the exit process takes a long time.  Let’s hope that one of the trendlines indicated yesterday offer firm support and the market won’t need to revert all the way back to the lower boundary as it did in the months immediately preceding Ronald Regan’s election.

March 28th, 2012

Just 10% to previous all-time high

Conversation on CNBC the other morning centered on why so many financial managers, hedge funds, institutional and individual investors are skeptical about the sustainability of the market’s strength.  The debate revolved around whether the skepticism results from the global situation, strength of the domestic economy, Federal budget deficit and its fix, the outcome of the upcoming Presidential election or any of a half dozen more reasons?

I wish, however, there had been a “none of the above” choice because I think the answer may actually lie in basic investor psychology.  The answer is as fundamental as the difference in perception, the mind’s eye, between a recovery move higher and a move higher into all-time new high territory.  When an individual stock or the market as a whole descends the far side of a valley in a crash or correction it leaves pivot point markers which serve as resistance levels on the near side as it ascends from the valley’s bottom [and for those doubters let me say there always is a bottom except for tulip bulbs and perhaps the Japanese stock market].  Those pivot point markers were the failed attempts to find and create the bottom.

After actually making a bottom and reversing, those earlier failed attempts often mark the approximate levels where fear takes hold that the recovery will fail again fueled by those who rationalize or explain why the recovery will fail and the market or stock will will turn lower again.  Remember all the talk back in 2009 about the S&P’s “double-top” that would lead to a final Wave 3 descent to below 600?  In August 2009, I wrote:

there are the Elliott Wavers led by Prechter who claim that a “Primary Wave 3″ down will soon get underway because “the DJIA has now retraced a Fibonacci 38.2% of the 2007-2009 plunge in stock prices, meeting a minimum threshold for the completion of the Primary Wave 2 rebound”. One Elliottician blogger also believes that

“the next wave down will likely entail the collapse of Western Civilization. Given the precipice of history at which the world stands, I’m hurrying to complete my thesis regarding the creative insanity of man. There’s a possibility of global nuclear war by mid-October according to my analysis.”

It was pure malarkey then and it is today.

But when the market or a stock ascends ever higher into all-time high high territory there are no benchmarks on the facing wall, no earlier pivot points where optimism slowed the fall which could now turn into skepticism and hesitation about the ascent.  Once the ceiling is penetrated, fears and reservations don’t stop the ascent but overconfidence, irrational exuberance and mania will.

Consider the S&P 500 in two alternative periods; the current secular bear market and the other the 1982-2000 bull market (click on images to enlarge):

But what does 10 or 15 years of stock market history have to do with investment decisions today?  What does it have to do with the explanations for investor skepticism given by those CNBC talking heads the other morning?  The relevance comes from the omission of one important fact not mentioned in the whole discussion:  the approach of one of the most significant pivot point benchmarks of the last 12 years …. the previous all time high, a mere 10% away from the market’s current level.  (To be technically correct, there is one other lessor precursor pivot point at around 1450 emanating from the other side of the Financial Crisis Crash valley that has to be crossed before the market can break into the clear, blue, cloudless skies of all-time new highs territory at around 1565.)

While the market is still 10% below its previous all-time high made in 2007, close to 40% of stocks are now trading higher than their highs of 2007 including such well-known leaders as QCOR, PCLN, GMCR, REGN, HSTM, SHOO and PRGO.

The secular bear market won’t die easily and it may yet survive forcing us to live through another major decline (that’s from where all that skepticism originates).  But then again, those talking heads haven’t yet had sufficient reason to think up the explanations and rationalizations for why the market will break through the resistance into blue skies.  But my guess is that they’ll have to start looking for them towards the end of this year.

February 17th, 2012

The Gestation and Rebirth of “Buy and Hold”

As January ended, I reiterated a hypothesis that the market was following the script written at the end of the 1970’s secular bear market by writing in That Old 1978-82 Analog Again,

“On the one hand, we might actually be escaping the Bear Market sooner than I had originally anticipated but, on the other hand, the analog may still be in play and we’re looking at a possible reversal for the remainder of 2012 in order to get back closer to the analog.  I guess if I had to choose between swallowing my pride at having missed a “forecast” and accepting the upside break out or meeting the forecast but delaying the opportunity of seeing a higher market again ….. I’ll live with having missed a forecast.”

Compare the two secular bear markets, note the similarity and draw your own conclusions (click on image to enlarge):

  • 1969-1980
  • 1999-2012

Combining the two charts in sequence produces the now familiar view:

For the past 5-10 years we’ve been listening to the mantra “Buy and Hold is Dead”.  Just do a search on the term and you see books, videos, TV clips, articles and blog posts …. I’ve probably even wrote it here several times over the past 6 years of this blog’s existence.  Not to be just a contrarian but because I believe it might be true, I now offer a heresy.  If we are witnessing the death of the current secular bear market might we not also be seeing the rebirth of buy and hold?

If the market over the next several quarter into early 2013 is laying the groundwork for a new bull market might it not be the right time to load up on stocks with great growth potential that you’ll want to hold for several years through several corrections?  It begins not with the search for specific names but with a reorientation of mindset to accept the possibility that the market can and will exit the secular bear market by crossing above the previous highs and finally move into uncharted waters.

Let me know if I’m being a cock-eyed optimist or that it might actually turn out to be a plausible scenario.

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February 14th, 2012

Is the Market Overvalued and Overbought?

I was struck by a post on Slope of Hope entitled “An Ongoing Balloon Ride” the major premise of which was that the the market has risen too far and diverged too far from its 400-dma such that there’s no questions “if this debt-filled balloon will disintegrate, but when“.  The writer’s premise is that the several times in the past when the Index has diverged as far as it has from its 400-dma have all been followed by a drop or correction.

I have my own database and decided to do my own research and gather my own facts to see whether I could replicate those results and come to the same conclusions.  My database goes back to 1963 and the moving average I rely on is the 300- rather than the 400-dma (but what difference does a hundred days make between friends).  The Slope writer visually picked the areas when the index diverged significantly from the moving average and eyeballed the subsequent change.  What I discovered was:

The S&P 500 Index is currently 6.38% above the 300-dma.  In the 12,089 trading days between March 12, 1963 and March 11, 2011, a spread between the index and the 300-dma of 5.00-7.99% occurred on one out of every 6 days, or 16.89% of the time.  One could almost say that this spread is “typical”, not large or overbought or stratospheric.  Actually,  it’s fairly typical.

One can look at both tails of the distribution as indications of how extreme the spread defining overbought or oversold situations, times when one needs to sell or has a true opportunity to buy.  In 2008 and 2009, at the depths of the Financial Crisis Crash, the market was over 35% below the 300-dma …. we should have all bought then but few had the nerve.  In August, 1987, the market was 24% above the 300-dma; a few months later, the market suffered it’s largest single daily decline in the October Crash …. we should have sold.

The market was more than 20% above the 300-dma also in 1983 as the market rocketed in celebration of its exit from the secular bear market of the 1970’s.  Rather than crashing, the market went into a horizontal consolidation lasting 15 months (just like the past 15 months?  I’ll leave that determination for you to make.)

So is the market now overbought?  Not if you use the 300-dma as a benchmark.  Did the Slope of Hope contributor select a seldom used 400-dma benchmark to prove his point?  It’s possible.  Where would the market have to be for it be overextended or overbought by these measures?  Somewhere around 1500-1550 …. interestingly, exactly the level of the market’s all-time high as measured by the S&P 500.

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January 30th, 2012

That Old 1978-82 Analog Again

A post on Ritholtz’s Big Picture blog reflected a conclusion I recently reluctantly needed to begin facing.  Regular readers know that for over two years I have been tracking the path of the S&P 500 Index in what I call “Reversion to the Mean” (last mentioned here on November 4).  Briefly, the hypothesis was that the S&P has been growing since 1938 at an average annual rate of 7.5% and that it’s volatility around that growth rate was contained in a band of 40% above and below the mean growth rate.  The chart depicting that trend, updated with today’s S&P close of 1313.01.

The market’s horizontal path since the end of the Tech Bubble in 2000 appeared to me to have an uncanny resemblance to the secular bear market of the 1970’s. Consequently, I used the end of that prior secular bear market as an analog for the malaise that we’ve been suffering through for the past 11, going on 12 years and wondered where the market might wind up if it exited this time exactly like it did in 1978-82? The result was the following chart:
In November’s blog I wrote:

“…the market has been tracking fairly closely to the exit process back in the ’70′s so far. If that track continues for the near-term, we shouldn’t expect the market to approach the all-time high of 1365 until 2015 and not successfully cross above it until 2017. Let your hearts not lose hope because if it continues following the track then it could reach 3000 by 2020.”

So here we are, two months later and the market is only around 4% away from 1365.  With corporate earnings reports better than anticipated, we’re now beginning to read stories about expectations for expanding multiples and higher markets.  In a Bloomberg article today:

“Multiples for the benchmark gauge rose as high as 13.82 this year. Should earnings match analyst forecasts and climb to $104.78 a share, the index would have to reach 1,718.39 to trade at the average ratio of 16.4, according to data compiled by Bloomberg. That’s more than 30 percent above its last close. “


The following chart in Big Picture was the coup de grâce:

This is exactly the analog I’d been following for close to two years.  On the one hand, we might actually be escaping the Bear Market sooner than I had originally anticipated but, on the other hand, the analog may still be in play and we’re looking at a possible reversal for the remainder of 2012 in order to get back closer to the analog.

I guess if I had to choose between swallowing my pride at having missed a “forecast” and accepting the upside break out or meeting the forecast but delaying the opportunity of seeing a higher market again ….. I’ll live with having missed a forecast.

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