- As of May 13, 2014 the Total Market Cap vs. GNP has reached a historical 117%.
- The S&P 500 Index historical weekly chart from 1960 is showing a peak.
- The S&P price to earnings ratio has reached 23, while the median range is 15.5.
- Tech stocks appear to be leading the way down once again, as they did in the year 2000.
If you are not quite old enough (yet) to experience the 1929 stock market crash, the 1987 market crash, or the 2000 tech bubble sell-off, then surely you remember the 2008/9 market swoon. If so, you will want to take a look at the charts provided in this article and not simply ignore them. The markets have recently risen to historical high levels, mostly on the back of QE infusions over the past several years (which the Federal Reserve Bank has already begun to taper), and investors are remarkably repeating the past and removing all risk from the markets. Looking at some of the simplest signs the markets have to offer an investor, and heeding the warnings of some of the stock market's most respected analysts and investors, Main Street bulls might want to have a double-take at their investment portfolios and start exiting risky and extreme valuation positions. The Dow Jones Industrial Average (NYSEARCA:DIA), the S&P 500 SPDR (NYSEARCA:SPY) , and Nasdaq Powershares (NASDAQ:QQQ) have seen relentless gains over the past several years without a major correction.
During the stock market declines between 2000-2002/3 we saw the S&P 500 Index ($SPX) lose almost 727 points in value. Just five years later we saw the S&P 500 Index lose 878 points between 2008/9. Currently, the S&P 500 Index, again just five years removed from the last major market correction, the Index is sitting at all time highs touching the 1900 level in exuberant fashion.
The chart is showing a distinct correlation in the time between each previous market correction and the apex at which these corrections occurred. It appears the markets are ripe for the next major market corrections when looking at the period between 2000 and present.
Another important chart to watch, shows the correlation of the Total Market Cap vs. GNP, historically. Many analysts, and investors like Warren Buffet and Soros, use this metric as the most important sign that stocks are extremely over-valued and ripe for a major sell-off. Currently this number stands at a whopping 117% as of market close on 5/13/2014. The last time the percentage was this high was, of course, 2008. Currently, the markets are sitting 50% above the 2008 collapse area and almost 50% below the 2000 collapse area. Trading exactly in the mid-range of these two ranges, the markets are looking very overbought here.
Another very important chart that will have bull market enthusiasts shaking in their boots is the current S&P price to earnings ratio, which currently stands at 25.5 using the Schiller P/E Ratio. Take note, that when the market began its correction between 2000-2003, the P/E ratio was at 44. When the 2008/9 correction began the P/E ratio was 26.5, and just 1 point above where our current markets are approaching.
The recent weakness and sell-off in tech stocks on the NASDAQ resembles the tech bubble sell-off in the year 2000. Tech stocks were at such lofty levels and valuations, just as they are now, investors were not paying attention, discounting all market risk, and were completely caught off guard in a short time period. We see some of these extremely lofty levels in stocks like LinkedIn (NYSE:LNKD), Netflix (NASDAQ:NFLX), Intercept Pharmaceuticals (NASDAQ:ICPT), athenahealth (NASDAQ:ATHN), Tesla (NASDAQ:TSLA) and many others that started to correct already. The NASDAQ Composite Index (IXIC) is off almost 6% this year and likely to fall much further and lead the way down for overall markets in a repeat of the tech bubble market sell-off.
Additionally, some of the same warnings from 2006/7 that were voiced by some of the markets most respected investment names, that were completely ignored at that time and before the 2008/9 meltdown, are beginning to resurface. Buffett, Soros, Faber, and others are again showing signs of bailing from the markets and leaving the bags in Main Street investor hands once again. Recent articles can be seen here and here.
With the VIX (Volatility Index) at all time historic lows, euphoria has seemed to take over once again, and risk in the markets is being ignored. When everyone is this bullish, then it is probably time to think about repositioning your portfolio. When the next major market will occur is not an exact science, but just like visiting the beach, I like to read what the signs tell me before entering shark infested waters or driving down roads with open trenches. Market bulls may want to pay attention to these charts, respected investors and analysts, and what the signals are telling them this time around. By no means am I trying to signal a gloom and doom scenario, but the charts are starting to show the tell tale signs of a major correction coming soon based on history.