Are We Poised for Another Great Bull Market?

Last week I presented a historical study of what happens when the S&P 500 is this far away from its 200 day moving average. If you missed it, click the link to check it out in full.

According to the study, when the stock market has trended enough to set off this indicator, it has trouble continuing its heady ways in the months that follow. The average 6 month return is -5%.

If you look at the data carefully, it becomes apparent that certain date ranges contain a lot of repeated instances where the S&P 500 index is 20% or more above its long term moving average. We’ve just traversed one of these periods from September 16th to the 22nd. Between those dates there were 5 consecutive days where the S&P 500 was at this threshold (or very, very close).

The last time this occurred was at the end of July 1997. But the best example of tenacity in this indicator was in late 1982, just as the great generational super bull market was launched. Although the expected consequence of such an overbought condition is for the market to hit a wall, or at least to pause, during the start of the great bull market, this was not the case. While it continuously flashed red, the stock market continued to climb higher and higher, acting very out of character.

So the question is whether what we are seeing is a repeat of that atypical market action. In other words, do bull market rules apply?

Although there is no way for me or anyone else to prove it definitively one way or another, I highly doubt that what we are witnessing is the dawn of another rare secular bull market based on one variable: valuation.

I mentioned a lot of ratios, statistics and data before but putting all those numbers aside, here is a simple chart which sums up the strange voyage we have taken, from fully priced perfection to panic induced forced liquidation and back again:

That doesn’t look like a great launch pad for the next generational bull market. Heck, even bonds are priced for perfection. At best, we are going through a cyclical bull market - otherwise known as a bear market rally.

Comments

[bbro:]

Why do people insist on looking at the market inflation adjusted
when the S&P 500 is not quoted in inflation adjusted terms.....
I understand the importance of inflation ( and deflation) but lets
keep it apples to apples.....

Sep 30 06:40 AM

[chap08:]

What is "priced in" depends on how you do the pricing. I think your chart comes from David Rosenberg. He seems to do his valuations based on the short term. That makes no sense to me because what you are buying are long term investments. Unless of course you're trading, but then you'd better realize that valuation has almost zero correlation with short term moves. That's what the historical data shows.

Take his chart for early 2009. This says that the valuation of the S&P factors in GDP growth of -2.5%. What does that mean? Does it mean -2.5% pa ongoing? That doesn't make any sense. Does it mean -2.5% for 1 year? That doesn't make any sense either because the valuation would be heavily dependent on your growth assumptions for subsequent years.

I wouldn't make a strong case for stocks being undervalued, and I wouldn't make any case at all for bonds being undervalued. But, if you're going to do a valuation, it needs a little more thought than this.

Sep 30 07:00 AM

[jeremiah74:]

i agree with what you are trying to say, but not with the way you are saying it. if this were a college or university essay, i would say: please elaborate in more detail

Sep 30 08:04 AM

[JG Savoldi:]

Our model says that we're about to get the answer to the question very soon. We're expecting a 22% crash into October 13th as the SPX kicks-off a larger degree decline toward 529 later this year/early 2010.

The BAM Model is not based on Elliott Wave Theory, but I'm also seeing a potential structure that would fit very nicely with our forecast.

I'll elaborate more on this thought on our blog later this week and post a few charts etc. but if you look at the SPX 11-21-08 low as a point of origin, and observe the 1.38 Fibonacci relationship between what could be interpreted as an A.B,C structure into the recent highs, that potential large 4th wave expanding triangle pattern would project down to SPX 521 in a "D" wave.

My interest in this pattern is that my model is calling for a 50% crash over the next 2-5 months (target 529 as I said) but it's then predicting what appears to be a melt-up to SPX 1132 before a further collapse into 2012-2014.

That would fit very, very nicely with this idea of a large degree Elliott wave expanding triangle 4th.

Regardless of structure, we're short here and expecting the crash to start accelerating to the downside later today as we enter the first of three crash zones contained in October.

9/30--10/2

10/13--10/14

Follow us on Twitter for the rest of the details!

bit.ly/l3hv8

Sep 30 08:33 AM

[AndrewBaker:]

Whether he will be right or wrong, JG Savoldi has b*lls in making his prediction. My own view is a drop in the S&P 500 index to somewhere between 500 and 550, which I've written about several times going back over the last few months, but I'm not brave - or good - enough to say when.

I thought it would have started before now, but market ramping of one sort and another has kept this rally going far longer than it should have done, in my view. I now favour the notion that we'll have a 1987-style drop at some point, and October does have a history of being the month when this type of fall occurs.

I'm short the index, financials and base/industrial metals, and long gold; and won't be changing that at this time.

Anyone out there holding stocks long had best keep a very very close eye on matters to avoid a nasty surprise in the offing.

Sep 30 09:20 AM

[The Geoffster:]

Wow!


On Sep 30 08:33 AM JG Savoldi wrote:

> Our model says that we're about to get the answer to the question
> very soon. We're expecting a 22% crash into October 13th as the
> SPX kicks-off a larger degree decline toward 529 later this year/early
> 2010.
>
> The BAM Model is not based on Elliott Wave Theory, but I'm also seeing
> a potential structure that would fit very nicely with our forecast.
>
>
> I'll elaborate more on this thought on our blog later this week and
> post a few charts etc. but if you look at the SPX 11-21-08 low as
> a point of origin, and observe the 1.38 Fibonacci relationship between
> what could be interpreted as an A.B,C structure into the recent highs,
> that potential large 4th wave expanding triangle pattern would project
> down to SPX 521 in a "D" wave.
>
> My interest in this pattern is that my model is calling for a 50%
> crash over the next 2-5 months (target 529 as I said) but it's then
> predicting what appears to be a melt-up to SPX 1132 before a further
> collapse into 2012-2014.
>
> That would fit very, very nicely with this idea of a large degree
> Elliott wave expanding triangle 4th.
>
> Regardless of structure, we're short here and expecting the crash
> to start accelerating to the downside later today as we enter the
> first of three crash zones contained in October.
>
> 9/30--10/2
>
> 10/13--10/14
>
> Follow us on Twitter for the rest of the details!
>
> bit.ly/l3hv8

Sep 30 09:21 AM

[David Van K...:]

Did your model predict the crash of 2007-2009? Did it predict the bull market (or bear market rally, whatever anyone wants to call it) of March 2009 to now? What is your model's prediction success rate, anyway, and how is that measured?

Sorry if you missed the 55% runup since March. It's been very fun.

Sep 30 09:31 AM

[buybigtires:]

I still go all in on the "Black Swan" mentality. Past charts are no predictor of future results, they just set us up for the unexpected.

That being said, I still don't think that we are in for a market boom, based on variables in world events. The Swine Flu scare (2nd wave), wheat rust (and eventually, higher pricing associated with scarcity), and random tsunami events are more than enough to send investors fleeing.

Uncertainty is what will keep the Bull at bay.

Sep 30 09:37 AM

[DonFurio:]

There is no way the S&P will be anywhere near 500 by the end of the year. I can understand if you were saying that maybe the next month or two we will be even or a small decline, but a crash, you must be crazy! I mean it was just released today that the economy barely dipped in the 2Q.

Go short so I can short bust the crap out of you. Yea, there are still issues in real estate, but the worst is past, so unless you are in really crappy stocks like CIT, you'll be fine. There are many money mgrs who missed the big rally, so if stocks even come down 15%, they'll be loading up.


On Sep 30 08:33 AM JG Savoldi wrote:

> Our model says that we're about to get the answer to the question
> very soon. We're expecting a 22% crash into October 13th as the SPX
> kicks-off a larger degree decline toward 529 later this year/early
> 2010.
>
> The BAM Model is not based on Elliott Wave Theory, but I'm also seeing
> a potential structure that would fit very nicely with our forecast.
>
>
> I'll elaborate more on this thought on our blog later this week and
> post a few charts etc. but if you look at the SPX 11-21-08 low as
> a point of origin, and observe the 1.38 Fibonacci relationship between
> what could be interpreted as an A.B,C structure into the recent highs,
> that potential large 4th wave expanding triangle pattern would project
> down to SPX 521 in a "D" wave.
>
> My interest in this pattern is that my model is calling for a 50%
> crash over the next 2-5 months (target 529 as I said) but it's then
> predicting what appears to be a melt-up to SPX 1132 before a further
> collapse into 2012-2014.
>
> That would fit very, very nicely with this idea of a large degree
> Elliott wave expanding triangle 4th.
>
> Regardless of structure, we're short here and expecting the crash
> to start accelerating to the downside later today as we enter the
> first of three crash zones contained in October.
>
> 9/30--10/2
>
> 10/13--10/14
>
> Follow us on Twitter for the rest of the details!
>
> bit.ly/l3hv8

Sep 30 09:44 AM

[MikeD71:]

The run to where we are now is absolutely and completely artificial. Mood, false hope and fake money. The DJIA could go to 12,000...and it won't mean a thing. Anyone sold on a solid "bull market", and is willing to gamble with their / clients money...is a bigger man than me. We're standing on a plank...that was made in China. Look out below!

Sep 30 09:56 AM

[Steve in TN:]

The Govt. is keeping the market on life support, but the wild card in my opinion is Israel getting extremely worried about the nation-ending threat from Iran and does attack. Oil prices would go through the roof.

Sep 30 10:06 AM

[thiazole:]

Yet you still discount the arguments of those who have been right all along as nonsense.

We told you that GDP would turn positive later this year, but you said there was no chance of that. You were wrong. 2nd quarter was just revised to even more "barely" negative and 3rd quarter will be positive - it it won't be barely positive either. 4th quarter will also be substantially positive. Now your economic forecasts from months ago were clearly way off base, yet you still hold to the same stock market predictions? The stock market will make fresh new lows in the face of substantially positive GDP?

Now I can understand your argument if you NOW have changed your position and are saying, "yes, we'll get a temporary period of positive GDP before the bottom drops out again". You'd be wrong, but I can at least understand that argument. But if you acknowledge that we have at least a couple quarters of positive GDP ahead of us, then why are you still short term bearish on the stock market? Have you ever seen GDP come out of a recession and the stock market plunges in response? Of course not. IF the stock market was going to crash as much as you imagine (which would require Armageddon 2), it isn't going to happen in the face of significantly positive GDP. So it isn't even POSSIBLE until some time next year. So why punish yourself with this short term bearish outlook?

For the record (not that I haven't given my position over and over), my outlook isn't THAT much different from yours - mine is just grounded in reality instead of bearish fantasy. We will see 2-3 quarters of strong GDP growth (3+%) followed by a multiyear period of weak GDP growth (averaging less than 2% and even with some quarters that are negative). Within a year, inflation will set in, the Fed will start raising interest rates and this will cause the stock market to falter. Over the next 5 years, we'll have racked up about 75% total inflation from today, yet the nominal price of the stock market won't be any higher than it is today (maybe even a little lower). In TRUE inflation corrected value, your price target for the S&P might not be that far off, but we won't get 75% inflation AND see a 50% drop in the S&P's nominal value.


On Sep 30 09:20 AM AndrewBaker wrote:

>My own view is a drop in the S&P 500 index to
> somewhere between 500 and 550, which I've written about several times
> going back over the last few months, but I'm not brave - or good
> - enough to say when.

Sep 30 10:19 AM

[Pauly B:]

You cannot take the US market as a sole indicator anymore. You have to look at various world markets and take them into context because they are all interrelated. Moreover FED policy and various central bank policies also affect our markets now as shown in the devaluation of the dollar. Lastly commodities worldwide also play a central role in the pricing of our markets.

Sep 30 10:39 AM

[JAMES CARLINI:]

I think we are in a DONKEY market. A stubborn market that is being pulled in two directions.

When you hear about it from some of the experts - there is a lot of braying going on about this particular gain and that "current trend" but when you try to see real movement (push or pull it), it's stubborn and really doesn't move much. It's sitting there between 9,500 and 10,000.

If something happens (even some narrow issue), it becomes very stubborn and won't move and may drop but there is always a lot of braying about the next big surge and the arrival of the bottom has been hit and now we are ascending.

Let's cut the cheerleading and look at reality. Significant jobs are needed in order to spark the whole economy. Real paychecks (and benefits) create real confidence not only in the market but also in the housing and automotive markets. Housing has NOT bottomed out and I still see people taking lesser jobs.

Temporary paychecks, underemployment of the middle class and uncertainty about keeping a job (layoff, outsourcing, whatever) creates a shaky consumer base who will not spend unless there are firesale prices. Then people may find the money to buy the bargain.

It's a donkey market right now. (I don't believe it is a Bear Market and definitely do not think it has enough steam to be a Bull Market).

When I hear more than braying, I'll get back to you.

Sep 30 11:06 AM

[carey_jim:]

Charts indicate clearly where we've been but not where we are going. They are useful for keeping clear about what happened and help to prevent us from believing things that aren't true.

However, there are other more fundamental reasons that point to the truth of your conclusion. They are economic, social, political and historical reasons.

One of the funny lessons of history is that Columbus would never have set sail for America without the primitive compass that he took with him; but his compass worked so badly that he sailed hundreds of miles off course and when he finally landed in Cuba he thought he was in Japan. He was looking for a passage to the Orient and so he thought the natives might also be Indians. They've been called Indians ever since.

Sep 30 01:10 PM

[Bling Daddy:]

We have no idea what will happen, none of us do. Throw some bones in the dirt and you would be just as likely to get an answer to the future direction of the market. The number of variables involved is staggering and makes forecasting impossible and chaotic. A chart alone cannot predict reality, otherwise, we'd all be tethered to pure stochastics and graphology. The above chart-based prediction is predicated on new real variables not mattering. It's like using the bible to prove the existence of God. (Not that God does or does not exist.)

Without big news/big problems it is doubtful that we will crash or explode from here. Fundamentals seem to point to a lower stock market valuation than is the current reality. I do believe this rally is due to government/artificial market manipulation and that cannot last.

If, despite all their efforts, a "bank"rupt industry and a debt encumbered government run in to problems in the near future, than a crash is likely as fear will accelerate and trust will dissolve.

Now seems an appropriate time to reflect on the astute observation that "when others are fearful, be greedy; when others are greedy, be fearful."

The only obvious thing now is that the masses are greedy. A fearful position seems justified.

Sep 30 05:45 PM

[bartpr:]

this upmove is due for a correction. every up move eventually has seen the 10 week ma of sap turn down before another move up. this has not happened yet. no one knows when though.

Oct 01 08:01 AM

[southbeach:]

JG, not sure if you're going Long on provocation just fishing for responses, but it's working! Anyway, though I agree this is likely a Government sponsored "bull" market bought at high cost by our future tax contributions, I'd be wary of betting on an imminent tide turn. Lots of sideline money missed the March steroid rally, and this is providing upside support in the face of fairly non convincing evidence of imminent recovery. I think the lows are in for the year, and we may not see any significant correction before EOY (though of course we're all looking for the sign to double short the market, and then plow profits into buying the next rise...)

Does anyone know of any good studies on the effect on equity valuation of massive aggregated fund pools which our pension and investment fund create? Seems to me there's a constant upward pressure on multiples from more and more capital chasing equity exposure/upside. Wondering if it's leading to a somewhat permanent shift to equities becoming too expensive on a risk adjusted basis?

On Sep 30 08:33 AM JG Savoldi wrote:

> Our model says that we're about to get the answer to the question
> very soon. We're expecting a 22% crash into October 13th as the
> SPX kicks-off a larger degree decline toward 529</span> later this
> year/early 2010.
>
> The BAM Model is not based on Elliott Wave Theory, but I'm also seeing
> a potential structure that would fit very nicely with our forecast.
>
>
> I'll elaborate more on this thought on our blog later this week and
> post a few charts etc. but if you look at the SPX 11-21-08 low as
> a point of origin, and observe the <span title="Convert this amount"
> class="currency_conver... Fibonacci relationship
> between what could be interpreted as an A.B,C structure into the
> recent highs, that potential large 4th wave expanding triangle pattern
> would project down to SPX <span title="Convert this amount" class="currency_conver...
> </span> in a "D" wave.
>
> My interest in this pattern is that my model is calling for a 50%
> crash over the next 2-5 months (target <span title="Convert this
> amount" class="currency_conver... as I said) but
> it's then predicting what appears to be a melt-up to SPX <span title="Convert
> this amount" class="currency_conver... before a
> further collapse into 2012-2014.
>
> That would fit very, very nicely with this idea of a large degree
> Elliott wave expanding triangle 4th.
>
> Regardless of structure, we're short here and expecting the crash
> to start accelerating to the downside later today as we enter the
> first of three crash zones contained in October.
>
> 9/30--10/2
>
> 10/13--10/14
>
> Follow us on Twitter for the rest of the details!
>
> bit.ly/l3hv8

Oct 01 08:26 AM

[J. Bruun:]

Savoldi,

This is a very bold call. The market action of today and yesterday does that support what your model predicts or are the declines not violent enough?

Jan

On Sep 30 08:33 AM JG Savoldi wrote:

> Our model says that we're about to get the answer to the question
> very soon. We're expecting a 22% crash into October 13th as the
> SPX kicks-off a larger degree decline toward 529 later this year/early
> 2010.
>
> The BAM Model is not based on Elliott Wave Theory, but I'm also seeing
> a potential structure that would fit very nicely with our forecast.
>
>
> I'll elaborate more on this thought on our blog later this week and
> post a few charts etc. but if you look at the SPX 11-21-08 low as
> a point of origin, and observe the 1.38 Fibonacci relationship between
> what could be interpreted as an A.B,C structure into the recent highs,
> that potential large 4th wave expanding triangle pattern would project
> down to SPX 521 in a "D" wave.
>
> My interest in this pattern is that my model is calling for a 50%
> crash over the next 2-5 months (target 529 as I said) but it's then
> predicting what appears to be a melt-up to SPX 1132 before a further
> collapse into 2012-2014.
>
> That would fit very, very nicely with this idea of a large degree
> Elliott wave expanding triangle 4th.
>
> Regardless of structure, we're short here and expecting the crash
> to start accelerating to the downside later today as we enter the
> first of three crash zones contained in October.
>
> 9/30--10/2
>
> 10/13--10/14
>
> Follow us on Twitter for the rest of the details!
>
> bit.ly/l3hv8

Oct 01 11:01 AM

[JG Savoldi:]

Yes, the BAM model predicted the 2007-2009 debacle in detail. You can refer to the baminvestor.com/blog archive and take a look at the actual weekly reports that went out to clients during that period.

You can also refer to the March 2009 entries and see that we didn't miss the "fun" as you put it.

A more controversial call at the time was when crude oil was trading at 147 and the BAM model predicted a "collapse to 36 dollars per barrel w/in 12-18 months.

All of this is well documented in the blog archives.


On Sep 30 09:31 AM David Van Knapp wrote:

> Did your model predict the crash of 2007-2009? Did it predict the
> bull market (or bear market rally, whatever anyone wants to call
> it) of March 2009 to now? What is your model's prediction success
> rate, anyway, and how is that measured?
>
> Sorry if you missed the 55% runup since March. It's been very fun.

Oct 04 03:07 AM