Starting with the dot-com bubble, the S&P500 entered a scissor pattern in which it cycles up to, through, over, and corrects down through As Reported Earnings (NYSE:ARE).
[All data regarding the S&P is quoted and charted from the S&P spreadsheet at: www2.standardandpoors.com/spf/xls/index/..., quarterly earnings spreadsheet]
Measured quarterly, the 3/31/2009 low took out gains dating back to 3/31/1997, an event that defines the adolescence of a twelve year old bear (named "internet-enabled-globalization" - "iggy" for short). The index quickly dismissed 12/31/08's -$23 ARE as an overtaken-by-events aberration and correspondingly closed at 903. 6/30/09's price/ARE pair of 919/$13.51 represents a will to rejoin regularly scheduled history already in progress, and, barring a black swan, that is the most likely scenario.
This is a picture of the S&P500 as projected against the US trade deficit since 1992, the year that NAFTA's inevitability first exposed US labor, productivity, and consumption behavior to the world in value terms. The vertical scales are unrelated, but the horizontal is aligned to the time periods 1/1992-6/2009. Since the dot-com bubble, the Bush era, and US corporate off-shoring exposed the inherent inversion of the US consumer's work-done/standard-of-living expectations compared to workers in southeast Asia, the S&P500 has traded in a highly correlated inverse trend to the trade deficit.
This is a picture of the same S&P500 data projected against the US Dollar's basket ratio, with the vertical scale unadjusted, but the horizontal scale stretched to align the periods between January, 1992 and June, 2009. The inverse correlation between the dollar and the S&P500 is again evident, here amplifying the unpopular global attitude since 2002 toward the proxy for US world prestige.
The durable relationship between the quarterly close of the S&P500 and ARE illustrate support for the hypothesis that absent black swans, investors gauge CxO's credibility as the trading metric of main resort. The speculative scissoring behavior is superimposed on top of that foundation by global real-time trading by amateurs. From 1999-2002, the price/ARE relationship was upside down. It was also upside down from 6/2007 - 3/2009. This scissoring behavior was absent prior to 1999 - the year the internet bloomed like a global pandemic of bubble-sickness.
We've re-entered a period where price is trailing ARE, though the moment of sanity is closing in a burst-cycle rally many refuse to believe even as it passes them by. 1050 is the historical mid-point for an ARE of $13.50. My trendlines say the target range of 1050-1200 is the crossover phase transition, if as-reported earnings come in $9-$12 after November 12 (using the informal earnings season of AA to WMT). The dot-com bubble pushed the inversion phase up for 18 additional months before correcting in a world innocent of millions of cafe-day-traders and 9/11, and generally happy with the US. The recent bubble pushed price above ARE for only one quarter before correcting. If you believe the S&P500 today lives in a hot-money, dollar-devaluation, Asia-v.-America, fundamentals-don't-matter world, then the latter example is the more likely chronological scale for what happens next.
If Q3 earnings season squeezes an ARE of $10 (S&P estimates $9.93) out of more mass layoffs, slack-slashing, and inventory fill, followed by the Jan-Feb 2010 earnings season printing an ARE of $5-$7 ((S&P estimates $8.49) after 16 months of no more to cut, sustained mass layoff events, consumer-credit contraction, and deflationary bargain-standoff spending delays shanking that inventory fill like a bad turn at The Beer Game; look for this scenario:
Now to mid-October 2009: continued low-volume melt-up to 1050-1200 speculatively exceeding historical expectations for 6/30/2009 ARE of $13.81.
Nov 13 to mid-January: Meltdown correction through Q3 ARE of $9-$12, to end near 1000, due to speculative flight.
mid-Jan to mid-Feb 2010: Whipsaws between 800-900 as ARE emerge toward $5-$7, fund managers cross swords with hot money to figure out the real value, and we're right back to 1997 (for the fourth time since 1997).
If you are in the "W" recovery camp, spring 2010 is the earliest the second "V" (as in double-U is spelled "V""V") can turn upward for real.
I'm not certain of Niall Ferguson's true ideological beliefs, but I am certain history will stamp this quote of his on the front of a best-seller years from now:
This bear is twelve years old, and bears can live to be thirty."You know back in late 2007, I was asked what my big concern was, and I said my concern is we’re going to get the 1970’s for fear of the 1930’s."
-Niall Ferguson at PEN/NYRB Modern Depression Symposium
Disclosure: no positions
UPDATE- author went long KR on the dip on 9/15.
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