A Teflon S&P 500

Includes: DIA, QQQ, SPY
by: The Panoramic View


In a New York Times op-ed, Yale Professor Shiller wrote that the market was greatly overvalued.

Other signs of a potential market top appeared, as George Soros reportedly increased his bearish bet by over 600%.

Despite the spate of bad news, the market continues to rally, as there is not enough bad news to convince investors that the top is in.

More signs of an approaching market top appeared over the past week.

In a recent New York Times op-ed, Yale professor Robert Shiller wrote that the market was greatly overvalued versus historical norms. Professor Shiller specifically stated that:

The CAPE ratio, a stock-price measure I helped develop - is hovering at a worrisome level.

I wrote with some concern about the high ratio in this space a little over a year ago, when it stood at around 23, far above its 20th-century average of 15.21. (CAPE stands for cyclically adjusted price-earnings.) Now it is above 25, a level that has been surpassed since 1881 in only three previous periods: the years clustered around 1929, 1999 and 2007. Major market drops followed those peaks.

As Professor Shiller is one of the world's foremost authorities on market bubbles given his successful calls on the housing and the tech bubbles, his opinion of the current market is worrisome.

In addition to the Shiller op-ed, several other ominous events occurred over last week:

  • Ukrainian tensions continued to escalate, as the nation's military forces reportedly destroyed a column of Russian military vehicles entering the country on Friday.
  • The rising geopolitical tensions sent the ten-year yield falling to 2.39%.
  • According to a 13F made public last week, George Soros increased his put position on the S&P 500 by 605% to a notional amount equal to 16.65% of his portfolio. While it is unclear whether Soros is hedging or placing a bearish bet, he has clearly become more bearish.

Other negative data points

The recent events are in addition to the other ominous signs, such as September approaching and the Fed tightening.

September is worrisome because it is also statistically the worst-performing month of the year. Since 1896, the Dow Jones Index has averaged a return of negative 1.09% during September, versus an average gain of 0.75% for other months. In addition, September is also the only month that yields negative returns more than half the time.

As the Federal Reserve tightens and the easy money dries up, shares of the speculative stocks in the market - the ones with stratospheric PE ratios - will likely stumble, causing the overall market to fall as well.

Momentum still strong

Those things being said, the S&P 500 continues to show remarkable relative strength. When news broke that Ukraine destroyed part of an armored Russian convoy, the S&P 500 initially fell 0.7%, but clawed its way back to near break-even.

Bullish momentum is a strong force, and it will take some time before it dissipates. Near the end of bull markets, bullish investors who bought every past dip control significant amounts of capital. Those bullish investors will likely buy this dip, and their collective buying may cause the market to rise.

This behavior can continue until enough data points convince market participants that the market has truly put in a top.

So far, the events that have transpired have not yet convinced enough people that the top is in, and the market remains a Teflon market that shakes every bit of bad news away.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.