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Summary

  • The SPY is not rising out of control and there is a lot of data to prove it.
  • As of May 2014, the Domestic Market Capitalization of the main U.S. Exchanges was $24.9 trillion, not that drastically higher than the 2007 and 2008 time period.
  • For ETFs like SPY, there will continue to be allocations away from other smaller capitalization companies to companies indexed by the SPY ETF.

Introduction

For the last few months, the amount of articles published about the "impending market meltdown" has gotten a bit excessive after considering the contributors' conclusions and how they reached them (using some sort of data set with no actual triangulation of ideas). So here is my shot at this topical obsession.

Just a general note, my position on the markets is that market levels are just not that out of the ordinary. I strongly believe that market levels are warranted and I have the data to back it up. This article will mainly cover the objectivity of a sound SPY investment and how investors should not be too worried about ridiculously volatile changes in the market (there will not be another giant market drop anytime soon).

Instrument of Choice: SPDR S&P 500 (NYSEARCA:SPY)

The SPY seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index. The Trust holds the portfolio and cash and is not actively managed. To maintain the correspondence between the composition and weightings of portfolio securities and component stocks of the S&P 500 Index, the Trustee adjusts the portfolio from time to time to conform to periodic changes in the identity and/or relative weightings of Index Securities.

Below is a summary of indices, comparing the S&P 500 index to the rest of the major indices. It's fairly easy to point out that SPY is not narrow enough to be classified as a "narrow" indicator and not broad enough to be a "broad" indicator (I consider the Russell 2000 a broad index), so this will need to be kept in mind throughout the remainder of the article. Overall, the SPY has captured a significant portion of the 2013 to 2014 price rises and that may be a direct link to market confidence; however, this is a premature conclusion and will need more than just loaded statements to defend my position on the market (that a market crash is not coming anytime soon and current levels are not that out of the ordinary).

Source: FactSet, Economic Charting

Below are four charts, covering the SPY index, Gold price, Crude Oil price, and S&P GSCI Commodity Spot Index. Based on these indicators, yes the SPY has surged beyond 2008 and 2009 highs, but commodity prices have been fairly stable and remain in relatively steady levels based on the charts below. Gold, Commodities, and Brent Crude Oil Spot have all been flat in 2014, so if contributors think index highs are a trigger for a crash or a pull back, they have clearly not synthesized the entire picture; commodities are not over inflated and are not swerving into random directions (as much as most investors assume).

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Source: FactSet, Economic Charting

Now to break down the SPY's sector performance relative to the entire index. My biggest question here is: is it so crazy that the Energy sector has driven the SPY up in the last three months given the recent findings in shale and the expectation that the United States will be the biggest oil exporter by 2020? Since most large Energy Companies are actually American (and are listed on U.S. Exchanges), it's not that crazy to assume that the Energy sector is a great place to be given the shale gas findings in the United States.

Energy is not the only sector with a reasonable story. Other sectors that have driven the SPY up include the Telecom, Utilities, and Consumer sectors, which have rallied on fundamentally strong earnings data (not market speculation). Furthermore, investors should expect more upside since the Healthcare and Tech sectors have taken a real beating in 2014 thus far; things should only rally more in the short term to reflect the consumer demand in the respective sectors. Overall, the markets haven't maxed out just yet… There is still a ways to go before all sectors are "maxed out," further driving the SPY.

Source: FactSet, Economic Charting

Using the below charts to help understand market movement: market volatility, interest rates, and spreads on interest rates have been steadily low. In fact, they are so low that fixed income businesses on Wall Street (including the big investment banks) have taken a significant beating on the lack of client flow and directional positioning as a result of lower volatility and interest rate levels.

The below indicators should also serve as indicators of stability in the global markets: the monetary institutions of Japan, USA, and the Europe have maintained to preserve corporate earnings growth by keeping interest rates low. Most investors don't see it this way, but the reality is things are not that volatile and more money is coming back to the table (the markets). Expect these conditions to remain constant for another year at the minimum because the last thing developed governments/Feds want is a collapsing growth story which took more than five years to develop (the last five years).

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Source: FactSet, Economic Charting

Now, some GDP analysis. Things in the United States (home of the SPY) look very good. The GDP charts above and below both point to fairly healthy conditions. The US GDP per capita is climbing to all-time highs (increasing the consumer confidence and lifting consumer purchases to boost corporate earnings) and the U.S. contribution to GDP growth has also seen an increase in Personal Consumption Expenditures (boosting more corporate profits in the mid-term). Overall, things don't look too unreasonable and there really isn't a "fallout" condition where the market will just result in an impending downturn. Investors betting on a massive correction should not bet that consumers will be driving the changes, because that will definitely prove to be a waste of time. Overall, the facts look good from a GDP standpoint.

Source: FactSet, Economic Charting

I included the below charts because I find them very interesting. The U.S. Capacity Utilization chart is still operating at a fairly low level compared to historical figures (dated all the way back to 1984). The U.S. Misery Index is nowhere near the highs from prior years. The Unemployment rate has trended downward and the U.S. New Home Sales have not really painted any type of interesting story. Overall, things do not seem that out of the ordinary right now.

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Source: FactSet, Economic Charting

The following charts paint a very good picture on where the U.S. economy is when it comes to Sales and Labor. Retail Sales aren't really surging out of control (which means companies listed on the SPY have yet to benefit from a significant rise in Retail) and Total Vehicle Sales are actually looking fantastic, which shouldn't be that much of a surprise considering the significant technological improvements into U.S. cars (excluding the General Motors (NYSE:GM) fiasco consuming the news).

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Source: FactSet, Economic Charting

And Now (Drum Roll), My Data to Back Up My Opinion

The charts below cover the Market Capitalizations and the Number of Listed Companies on the NYSE Euronext, NASDAQ OMX, and the American Stock Exchange. As of May 2014, the domestic market capitalization of the main U.S. exchanges was $24.9 trillion, not that drastically higher than the 2007 and 2008 time period (in comparison to the SPY, the market capitalizations do not indicate an inflated market as most assume based on the SPY's trading price highs).

In addition to a high and reasonable market capitalization, the number of listed companies on the major U.S. exchanges has actually consolidated over time. As of May 2014, the number of foreign and domestic listed companies was 5,084 (2,393 on the NYSE Euronext and 2,691 on the NASDAQ OMX). These data points do not indicate unreasonable market environments. In fact, the consolidation of publicly traded companies and the slightly higher market capitalizations actually mean that the current market environments are fairly healthy (on track to operate more efficiently, eliminating smaller caps and trading inefficiencies).

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Source: World Federation of Exchanges, Monthly Query Tool

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Source: World Federation of Exchanges, Monthly Query Tool

First Chart below: # of Equity Shares Traded by Exchange and type of volume. As of May 2014, the total number of equity shares traded was $421 million for the month, significantly less than 2008 volume levels. This is not a surprising indicator since the number of listed companies has dropped over time and further defends my claim; there is really nothing out of the ordinary going on here. Market levels have dropped as a result of generally lower trading volumes across the world markets after the crazy turnovers of 2008 and 2009 highs (the spikes in the chart below).

Second Chart below: # of Equity Shares Traded Total. As of May 2014, the total number of equity shares traded was $421 million for the month, significantly less than 2008 volume levels. The # of shares traded at the high was 1.1 billion shares traded for the month of October 2008, more than 250% higher than 2014 volume levels. 80% of shares traded in October 2008 were from electronic book trades - a staggering figure considering the noise in electronic activity these days. Once again, nothing too out of the ordinary here (investors and market participants aren't going crazy with the churning of shares traded). Compared to 2008 highs, market conditions are not getting out of control.

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Source: World Federation of Exchanges, Monthly Query Tool

The next chart sheds light on a fairly popular investment vehicle category: ETFs. Based on the data and chart below, the number of ETFs has surged over time as investors find the pre-selected passively managed investment vehicles (just like SPY) favorable; however, this should not be confused with increased allocation to ETFs since the other data set in the chart (the red line) shows the total trading value of ETFs traded (in monthly frequencies). Based on the chart, the increase in listed ETFs has little correlation with the total value of ETFs traded. Actually, this is a good indicator, showing a stagnant trading volumes trend, another sign that things aren't inflating out of control as most market commentators suggest.

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Source: World Federation of Exchanges, Monthly Query Tool

Conclusion

For the final chart, the green and purple lines are the actual NASDAQ OMX and NYSE Euronext Indices (in monthly frequencies). The red and lighter blue lines are ratios I calculated to show Domestic Market Capitalization vs. Index values (the data in the chart below for Domestic Market Capitalization is the same as the data charted in the earlier charts for Domestic Market Capitalization), which shows an investor two things: 1) as index values increase, a triangulation to the total market capitalization is put into perspective, and 2) whether increased indices reflect greater market growth on sheer dollars entering markets. Based on the blue box inserted on the chart below, the ratio I computed results in a flat trend; there is no material change over time, which means that market indices do not reflect an inflated market and things do not seem that out of the ordinary (money fueling the total market capitalization is not superseding the relative growth in index values). These are my views to help understand if markets are surging out of control, which based on the data/facts, is not the case. When taking into account market volatility, interest rates, and GDP growth/contribution, the economy and markets are very healthy and in position to grow much more than current levels.

For ETFs like SPY, there will continue to be allocations away from other smaller capitalization companies to companies indexed by the SPY ETF. In addition to a change in investment allocations into the S&P 500, corporate profits are only expected to grow in coming years as the world becomes a larger consumer of rapidly growing sectors (such as tech, energy, and healthcare, discussed earlier). There is much more upside to come before any type of market drawdown or the rumored impending downturn that most market commentators keep raving about.

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Source: World Federation of Exchanges, Monthly Query Tool

Source: There Isn't Going To Be A Crash Anytime Soon