People are scratching their heads as to why we are at this market level. Many feel they have missed the Big Boat, and cannot find anything to buy. Last October, many others were buying Gold at $1800 and are rightfully confused. Yesterday (this is Wednesday 23), the S&P 500 (SPY) had a 30 point down reversal, i.e. around 2% from an all-time high, the 10-Year Note went through 2% and the iShares Corporate High Yield (HYG) took a hit . Overnight, the Nikkei was down more than 7%.
I think it is time to take a giant step back, and put this move into historical context. Remember, we have been in uncharted waters before.
When the S&P Composite was created in 1928, the average for the year was 20. Then there was 1929-1932, and it took 23 years for it to get back to this level, in 1951, during the Korean War. Then, it marched on, up and down, and reached 100 in 1968, during the Vietnam War. In this 17-year period, there were four recessions, and the market went up 400%. Then, we had the 1970 Guns & Butter recession, the 1974 Oil Shock induced recession, and the Big Volcker which started in 1980, abated in 1981, and culminated in 1982. During that one, Fed Funds reached 20%, inflation reached 13%, and unemployment got above 10%. Where was the S&P 500 at the end of all of this: 150, i.e. 50% in 14 years. It then took another 13 years for it to reach 400, in 1995, for a 170% move.
The rest, you can read it in my book, was the infamous roller coaster which dubbed the 1999-2008 period the "Lost Decade", with a nominal loss of 1.4%, and a real inflation-adjusted loss of 3.9%. It actually started in 1995: up 300%, down 50%, up 100%, down 50%. As the table below illustrates, the next ten years after such a period usually produce pretty good returns. However, the one we have experienced since the end of 2008 stands out, at around 80% in four and a half years. And the number becomes 150% if we count from the 666 low of March 2009… So this is just another one of these uncharted waters. The table below is courtesy of Barry Bannister, Managing Director of Stifel Nicolaus, in early 2009.
Therefore, the question is, are we in a 300% to 400% Bull, or in a 100% to 200% move? Is this a 5-year cycle, or a 15-year cycle?
My short answer is 200% for starters, hence my 2000 Target from the March 2009 lows, and it's a long term cycle which should take us further. Strangely enough, it will be fueled by the consequences of the last three Bubbles, Internet, Leverage, and Housing, as they work their structural way through our economy, worldwide. Let's recap the short term.
On October 12, 2011, we were at around S&P 1194, my favorite pivot point of the PIGGS tumultuous period which had started a few months earlier. The market looked like this, and quite frankly I felt more like an alchemist than an analyst when I called for S&P Target 1600.
In early April 2012, as we were getting there, I had gone silent but I was tinkering with the next step. On April 22, I called it S&P Target 2000. We were at S&P 1562. Three weeks later, at 1650, I felt too many stocks were overextended and that the odds of breaking the uptrend channel were not worth the risk, so I suggested taking partial profits as stocks never top all at the same time and parabolic moves are always questionable. As usual my shorts hedges were the ProShares Ultra Short S&P 500 (SDS) and Russell 2000 (TWM).
Two days later, on May 16, we decidedly broke on the upside and I covered all my shorts at the open, S&P 1658, in answer to a reader whose name is "Change is The Only Constant", quite appropriately. I did not feel comfortable but I did not want to fight the tape. In retrospect, not only did we break the channel I had posted on May 14, but we broke a double channel as indicated below. No doubt, I will get many comments about the worth of technical analysis but, no offense, after thirty years in this business, I will use any tool that is available to me, especially in uncharted territory which this is. For the same reason I covered my shorts, I put them back in yesterday at S&P 1170 intraday, as it was shaping out as an intraday reversal and I had to hedge my performance. Guess what, I covered them today at S&P 1644, when the Advance/Decline was 530 to 2405. On the back of the Nikkei's decline, I would have expected such an A/D to generate more than a 1% down move, we were barely down 0.55% and bouncing of a couple of converging support levels at around 1633. If I felt like an alchemist in 2011, I now feel like a greedy pig. This is how the market looks since then.
I expect the next trading range to be 1600-1750. We may stay in there until Mr. Bernanke's fate is known, in January 2014. This is one of those external events that have nothing to do with mathematical valuation, but with an essential component of asset pricing: confidence in the "Grand Argentier", French for Minister of Finance, i.e. the guy with the bucks. The only pilots who can be trusted at this point are Dr. Ben Bee (Bernanke), Super Mario (Draghi) and Abe (not Lincoln, Shinzo). Actually, I continue to believe that Dr. Ben Bee, as I dubbed him in my book, should get the Nobel Prize in Economics Science. In case you missed it, Household Net Worth is now greater than its previous peak in Q3, 2007, and leverage is lower too. Compared to the trough in Q4, 2008, Household Net Worth is up 28%, at an all-time high of $66 Trillion (and then some since this was the Q4, 2012 number) - and Debt to Net Worth is back down to 20%, from 28% in 2008. So what's $3 trillion in QE, or even $16 Trillion in Government debt … (to be continued).