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The Market In Pictures - The Aging Bull
Submitted by Lance Roberts via STA Wealth Management,
In January, I did a chart analysis of the markets suggesting that being overly optimistic going into 2015 could be dangerous.
"As we enter into 2015, analyst calls for a continued "bull market" advance have never been louder. There have been a litany of articles written recently discussing how the stock market is set for a continued bull rally. The are some primary points that are common threads among each of these articles which are: 1) interest rates are low, 2) corporate profitability is high, and; 3) the Fed's monetary programs continue to put a floor under stocks. The problem is that while I do not disagree with any of those points - they are all artificially influenced by outside factors. Interest rates are low because of the Federal Reserve's actions, and corporate profitability is high due to accounting rule changes following the financial crisis. Lastly, the Fed's liquidity program artificially inflated stock prices.
While the media continues to pound the table with all of the bullish arguments that should continue to drive the current advance in the markets, it is only prudent to at least attempt an understanding of the counter arguments. The "risk" to investors is not a continued rise in the financial markets, but the eventual reversion that will occur. Like Wyle E. Coyote, since most individuals only consider the "bull case," as it creates a confirmation bias to support their "greed factor", they never see the "cliff" until it is far to late."
As we end the third quarter of the year, those warnings have come to pass. However, the debate that began this year remains - are we still within an ongoing multi-year bull market OR has the next cyclical bear market taken hold?
The series of charts below is designed to allow you to draw your own conclusions. I have only included commentary where necessary to clarify chart construction or analysis.
If you have any questions, or comments, send me a tweet: @lanceroberts
Valuation Measures
The following chart shows Tobin's "Q" ratio and Robert Shiller's "Cyclically Adjusted P/E (CAPE)" ratio versus the S&P 500. James Tobin of Yale University, Nobel laureate in economics, hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs.
The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets. Dr. Robert Shiller, also a Nobel Prize winning Yale professor, created CAPE to smooth earnings variations and volatility over time. CAPE is calculated by taking the S&P 500 and dividing it by the average of ten years worth of earnings. If the ratio is above the long-term average of around 16x, the stock market is considered expensive. Currently, the CAPE is at 25.5x, and the Q-ratio is at 1.02.
My friend Doug Short regularly publishes Ed Easterling's valuation work. Ed Easterling, Crestmont Research, has done extensive studies on valuation and resulting long-term returns.
The next two charts are variants on Robert Shiller's CAPE. The first is just a pure analysis of CAPE as compared to the S&P 500.
[For More On Shiller's CAPE Debate read: "Is Shiller's CAPE Really B.S." and "Shiller's CAPE, A Better Measure"]
The next chart shows the deviation of valuations from their long-term average.
Measures Versus The Economy
One of Warren Buffet's favorite valuation measures is Market Cap to GDP. I have modified this analysis utilizing real, inflation-adjusted, S&P 500 market capitalization as compared to real GDP. I have also noted the long-term median level as well as the average since 1990.
Since the stock market should be a reflection of the underlying economy, then the amount of leverage, or margin debt, in the market as a percentage of GDP could provide an important clue.
Deviation Measures
The following charts are measures of deviation from underlying trends or averages. The greater the deviation from the long-term trends or averages; the greater the probability of a reversion back to, or beyond, those trends or averages.
The first chart is the 72-month rate of change in the price of the S&P 500 relative to the index itself. Large spikes in the rate of change have normally been seen prior to intermediate and long-term market peaks.
The next chart is the deviation in the price of both the S&P 500 and Wilshire 5000 from the 36-Month moving average. For more discussion on this chart read this.
The chart below is the same basic analysis but utilizing a 50-week moving average which is a more "real-time" variation. Importantly, note that historically when the market has significantly broken the 50-week moving average in the past, it has denoted a change in market trend.
This potential change in trend can be more clearly seen in the chart below. Note: The market has not currently broken the previous bullish trend line that begin in 2009, however, historically it has just been a function of time.
The volatility index (VIX) is representative of investors "fear" of a correction in the market. Low levels represent investor complacency and no fear of a market correction. Despite the recent correction to date, investor complacency remains elevated.
Just For Good Measure
I recently wrote about the importance of "record market highs" stating:
"...while markets have risen over time, the markets spend roughly 95% of their time making up for previous losses."
And A Reminder
Recently, John Hussman tweeted this chart of the S&P 500 that lists all of the warnings signs of a crash that we are experiencing now.
"Anatomy of a textbook pre-crash bubble. Don't rely on further blowoff, but don't be shocked. Risk dominates. Hold tight."
This analysis can tell us much about where we are within the current market cycle if we choose to pay attention. While it is certainly easy to bet on "hope," it is important to remember that it is far harder to make up losses when things go wrong.
What has always separated successful professional gamblers from the "weekend sucker" is knowing when to step away from the table.
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It's been dangerous going into the 21st Century, donchaknow?
It had a century of momentum. Nearly a century and a half if you start with the end of voluntary union. But you can start at the beginning, as well:
Is it conceivable that this document so revered was conceived in perfidy and that its primary purpose was the installation of a powerful moneyed oligarchy, that it was neither created by “We the people,” nor designed to serve them? As historian Woody Holton observes, “It is an unsettling but inescapable fact that several of the principal authors of the U.S. Constitution, which has served as a model for representative government all over the world, would never had made it to Philadelphia if their constituents had known their real intentions." — http://www.globalresearch.ca/americas-history-and-the-constitutional-hoa...
Was it really a Bull market with Zero percent rates?
Yes, total bull.
If you like your 0% interest rate you can keep it.
there's that word again. *market*
Well since the clik bait was boxing
This market is starting to look like Holyfields ears in a Mike Tyson fight. Getting eaten alive
Watch the Venezuela stock market.
Stocks are way up, all the rest is worthless.
So thir market has a very long way to go. All the rest is more important. Gold and silver are the only smart move here.
http://realmoney.thestreet.com/articles/09/28/2015/bear-market-carnage-w...
Bear Market Carnage: Who Will Be Hit First?
By Jim Collins
September 28, 2015
Carnage. It's a one-word description of what's going on in the markets. To really understand the force and violence of selling pressure, one must look beyond the three "major" indices. The DJIA, S&P 500 and Nasdaq composite are all trading in correction territory, as of today's noontime pricing. All three major indices were down at least 10% from the recent mid-July market highs.
That's all well and good, but if you lift the hood, you are going to find many sub-indices, non-US indices and asset classes that waved goodbye to correction territory. They are now being gripped by the jaws of the bear.
A bear market is generally defined as a decline of at least 20% from recent highs, so twice as damaging as a correction. But there's a subtext to these words that you might not find by Googling them.
The term correction implies a temporary condition that is followed by a return to an uptrend.
The term bear market implies an extended period of lower stock prices. That's the difference. Bear markets last; corrections don't.
And it is the duration of bear markets that makes them so darn unpleasant. The ramifications are felt widely, and so much more so, when there is absolutely no yield anywhere else in the world, but for high-yield and emerging markets bonds -- markets that are experiencing declines worse than those felt in the U.S. stock market.
But can't an investor just wait it out? If you are an individual, you might be able to, but remember that individuals represent (according to Goldman Sachs) only 34% of direct U.S. stock ownership. Institutions own the rest of the shares outstanding, and many of them -- for different reasons -- need equities to perform well in order to meet their obligations.
That's the problem with this Fed-QE, marshmallow-world fantasyland that has been in effect since the end of 2008. Capital gains have replaced yield as a means of generating required returns, and that is just not sustainable.
This environment has encouraged risk-taking, and as risk is removed, the nominal wealth of the world's economy is lowered. Simply put, people are worse off.
Who gets hit first?
Investment banks. Lower equity prices lead to less deal flow, and the bulge-bracket banks have supported themselves through fees generated from stock and bond offerings. That can -- and will -- dry up very quickly.
State and local governments. The perilous finances of some of America's most populous cities and states has been well-reported. But the key point isn't that deficits are being run -- although they are, and cities like Chicago are implementing draconian measures to try and stem the bleeding -- it's that long-term liabilities are unfunded to an even greater degree when fund returns don't meet their benchmarks. An example would be the Teachers' Retirement System of Illinois. TRS had 41.2% of its assets in stocks as of March 31. The recent pullback in equity prices could put their already underfunded pension plan into serious financial jeopardy.
Just remember this "bulltards": even cheap money has to be paid back sometimes. And that is exactly what is becoming increasingly unlikely.
"Easy to bet on hope".
We tried that shit 7 1/2 years ago and look where it got us.
Yup, paper bugs are going to get the gold bug rinse treatment!