The Fed’s Answer to the Ghastly Monster of its Creation

Acting-Man

The Bubble Machine

The launch angle of the U.S. stock market over the past decade has been steep and relentless. The S&P 500, after bottoming out at 666 on March 6, 2009, has rocketed up over 370 percent. New highs continue to be reached practically every day.

S&P 500 weekly, since the low of 2009. A party of roaring 20s proportion in terms of duration, extent and end point valuations (a post-war inflation episode triggered a devastating bear market from November 1919 to August 1921, in which the DJIA fell from ~120 to ~64 points. It then rose until early September 1929, topping at ~380 points. By the time it peaked, Wall Street had created all sorts of new-fangled instruments such as the then highly popular investment trusts, everybody was speculating on margin and the equivalent of today’s FANGs such as RCA (“Radio”) traded at previously unheard of multiples – as did the rest of the market. Numerous sharp corrections along the way had eradicated the perception of risk in investors’ minds. We have discussed the parallels between the two eras before, and in the meantime another parallel can be discerned in the charts. In late 1928 the market suffered a sharp sell-off in the normally seasonally strong period, very similar to what occurred in 2018. It was the biggest correction of the entire bull market, but the market swiftly rallied again and by February 1929 it made new highs. It then proceeded to build a chart formation known as “three peaks and a domed house”. The three peaks of 2019 are not a perfect replica of the basic schematic of the formation, but the timing is in line with it (they are supposed to be established within 6-10 months). George Lindsay’s original schematic is very detailed, it is therefore unlikely that the pattern will repeat perfectly every time. The so-called domed house can take up to 7 months to form, but we would focus on the shape rather than the precise duration. Whether the formation does indeed form remains to be seen. It is definitely something worth keeping an eye on. [PT]

Over this stretch, many investors have been conditioned to believe the stock market only goes up. That blindly pumping money into an S&P 500 ETF is the key to investment riches.  In good time, this conditioning will be recalibrated with a rude awakening. You can count on it.

In the interim, the bull market may continue a bit longer… or it may not.  But, to be clear, after a 370 percent run-up, buying the S&P 500 represents a speculation on price. A gamble that the launch angle furthers its steep trajectory. Here is why…

Over the past decade, the U.S. economy, as measured by nominal gross domestic product (GDP), has increased about 50 percent. This plots a GDP launch angle that is underwhelming when compared to the S&P 500.  Corporate earnings have fallen far short of share prices.

Hence, the bull market in stocks is not a function of a booming economy.  Rather, it is a function …read more

Source:: Acting Man