Sizing Up the Bubble
“In the ruin of all collapsed booms is to be found the work of men who bought property at prices they knew perfectly well were fictitious, but who were willing to pay such prices simply because they knew that some still greater fool could be depended on to take the property off their hands and leave them with a profit.”
Chicago Tribune, April 1890
Presently, the broad NYSE Composite Index is at a lower level than it set more than 2 years ago, in July 2014. Including dividends, the index has gained hardly 2%. Several indices dominated by large capitalization or speculative growth stocks, particularly the S&P 500, have performed better, but even here, the index is only a few percent above its December 2014 high. Over the past two years, the behavior of the stock market can be described less as an ongoing bull market than as the extended topping phase of what is now the third financial bubble since 2000.
The chart below shows the current setup in the context of monthly bars since 1995. After the third longest bull market advance on record, fresh deterioration in key trend-following components within our measures of market internals (see Support Drops Away) recently joined this extended, overvalued, overbought, overbullish peak, even as the S&P 500 hovers at the top of its monthly Bollinger bands (two standard deviations above the 20-period average) and cyclical momentum rolls over from a 9-year high. Taken together with other data, we continue to classify present conditions within the most hostile expected market return/risk profile we identify.
The great victory of the Federal Reserve in the half-cycle since 2009 was not ending the global financial crisis; the crisis actually ended in March 2009 with the stroke of a pen that changed accounting rule FAS157 and eliminated mark-to-market accounting for banks (instantly removing the specter of widespread insolvencies by allowing “significant judgment” in valuing distressed assets).
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