J.P. Morgan Asset Management has developed a chart showing the past two cycles in the S&P 500 highlighting peak and trough valuations. At face value it is very alarming as it suggests a potential decline of somewhere in the vicinity of 60% over the next year or two and concurs with previous innovative trend analyses included in this article. Charts: 4
The chart* below shows the S&P 500 at its inflection points over the past 15 years showing the % increases and decreases between peaks and troughs complete with index levels, dividend yields, and the 10-year U.S. Treasury yield.
The S&P 500 in DXY terms Against the Nikkei 225 Lagged by 9.75 Years
Several years ago market strategists Sadiq Currimbhoy, Arik Reiss, and Jacky Tang of Bank of America Merrill Lynch Asia identified a pattern** that supported the likelihood of additional gains and declines in the S&P 500 regardless of the extent of the economic recovery in the U.S.. The analysts plotted the S&P 500 in DXY terms against the Nikkei 225 by rebasing the S&P 500 to the same peak as the Nikkei but lagged by 117 months (i.e. 9.75 years). They uncovered an uncanny relationship as shown in the chart below.
Their analysis suggested that the S&P peak would be achieved on December 10th, 2010 but, no doubt because of the aggressive quantitative easing by the Federal Reserve, that peak was not realized until just a few days ago (January 3rd, 2013) at 1466.47. If their projected bottom of January 3rd, 2014 were to remain a constant bottom we could expect a decline between now and January 3rd, 2014 of approx. 60%. That would put the S&P 500 at 586 which would fit in quite nicely with the inferred projection from the J.P. Morgan chart.
The ‘Historical Peak-Trough Index’ Analysis
The Merrill Lynch strategists went further. They constructed an equally-weighted index of all markets that have crashed more than 45% since 1970 plus the U.S. stock market crash in 1930 and then averaged the recoveries from these crashes (referred to as the ‘Historical Peak-Trough Index’). When this Index was compared to markets that have experienced similar deterioration they concluded that the current S&P 500 index looks like it’s following a similar pattern that would have the S&P 500 topping out at somewhere around 1400-1500 before crashing back to it’s 1994 low of 400 (when the stock market bubble first began) by the end of 2013 or early 2014.
The Merrill Lynch Asia strategists maintained that the rally in the S&P 500 would likely be triggered by central bankers keeping interest rates low (they have), an economic recovery (slowly underway) and/or an undervalued dollar (which has turned out to be the case).
The Mega-Bears Analysis
Taking this analysis one step further, Doug Short does an on-going inflation-adjusted overlay analysis*** of the “Real” Mega-Bears. It aligns the current S&P 500 from the top of the Tech Bubble in March 2000, the Dow in 1929, and the Nikkei 225 from its 1989 bubble high.
The chart below is a real (inflation-adjusted) analysis of long-term market behavior. The nominal all-time high in the index occurred in October 2007, but when adjusted for inflation, the “real” all-time high for the S&P 500 occurred in March 2000.
The chart clearly suggests, even without the 9.75 year time-lag, as put forth by the Merrill Lynch analysts, that the S&P 500 is due for a significant correction.
The analysis of J.P. Morgan, Merrill Lynch Asia and the current charting by Mr. Short bear scrutiny and ongoing review for us to successfully navigate these unsettled financial waters.
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The NYSE Composite and Wilshire 5000 index COULD BE forming one of the largest “Bearish Head & Shoulders” patterns in the past 100 years and IF they, in fact, are then we are about to see a 40% decline in those indices and the S&P 500 would most certainly follow suit. Take a look at the charts that tell the story. Words: 200
The S&P500 is likely to achieve a secular (long term) peak this month, then drop to the 500s by July-August 2013. This article explains why. Words: 180
Based on the latest S&P 500 monthly data, [my analyses indicate that] the market is overvalued somewhere in the range of 33% to 51%, depending on which of 4 indicators I used. This is an increase over the previous month’s 31% to 48% range. [Let me explain the details.] Words: 475
Harry Dent, the financial newsletter writer and CEO of economic forecasting firm HS Dent, has one of the most bearish calls on stocks we’ve heard in a while. Appearing on CNBC yesterday, Dent explained the demographics-driven thesis behind his Dow 3000 call.
Charles Nenner has been accurately predicting movements in the liquid markets for more than 25 years, and his most recent cycle analysis predicts that the current stock market rally is going to last through Q2 and then begin a major descent in 2013 – with the Dow eventually reaching 5,000! Read on to learn how Nenner’s unique system works and what he forecasts for commodities, currencies, bonds, interest rates and more. Words: 400
By smoothing out the effect of the business cycle on corporate earnings, investors get a truer picture of how expensively or cheaply stocks are priced. Yale professor Robert Shiller has popularized this concept and packaged it as the Shiller P/E ratio, alternatively known as the cyclically-adjusted P/E (CAPE) ratio, and it has become a widely followed and efficacious stock market valuation measure. Currently the ratio is standing at a 21.4 (approximately 30% higher than its long-term average) causing many value investors to adopt a cautious stance toward US stocks. [Let me explain more fully.] Words: 690
Renewed leadership by the sectors that stand to benefit most from a stronger economy and profit growth down the road…could be one of the best indications that perhaps the worst is indeed behind us and the rally has more room to run. However, if these cyclical sectors fail to participate more fully, that would be a signal of more potential trouble ahead. [Let me explain.] Words: 840
The Q Ratio is a popular method of estimating the fair value of the stock market developed by Nobel Laureate James Tobin. My latest estimates [suggest] that the broad stock market is about 33% above its arithmetic mean and 42% above its geometric mean……Periods of over- and under-valuation can last for many years at a time, however, so the Q Ratio is not a useful indicator for short-term investment timelines [and, as such,] is more appropriate for formulating expectations for long-term market performance. [Let me review the Q ratio with you, along with several graphs, so you can clearly understand what the Q ratio is, how it works and what it is currently conveying.] Words: 800
Goldman Sachs reports their Global Economic Indicators (GLI) show the world has re-entered a contraction and…is predicting a market crash worse than that of the early 90′s recession and one slightly less than the sell-off at the turn of the millennium. [Below are graphs to support their contentions.] Words: 250
Mark Spitznagel…warned the other day that the S&P 500 could lose 40% of its value in the next couple of years. So what black swan event could cause the S&P 500 to drop down to 760? [Let’s take a closer look.] Words: 856
It has been determined by a number of market analysts (see below) that the S&P 500 could continue its progression to as high as 1500 in the first half of 2011 before it collapses completely based on a unique comparison with the Nikkei 225. Before you reject this possibility out of hand please read the entire article. Words: 596
The next decade will surely be especially turbulent, because that’s when markets and politics will sort out what the inevitable train wreck in the US entitlement programs will look like. Words: 713
The Dow Jones Industrial Average (DJIA) Index – the oldest stock exchange in the U.S. and most influential in the world – consists of 30 companies and has an extremely interesting and distressing history regarding its beginnings, transformation and structural development which has all the trappings of what is commonly referred to as pyramid or Ponzi scheme. Words: 1233
Investors have a short memory, in 1995, the DJIA was around 4000. Today our economy, it could be argued, is actually weaker than it was back then. Words: 427