Monday, December 23, 2013

Bubble Acceleration Noted

This is the monthly chart of the current S&P 500 stock index. This is literally a textbook case of what a bubble looks like. There are many characteristics of a bubble, and I literally can't think of a single one that this current market circumstance does NOT manifest. 

Note in this chart the light blue line, which represents the 8-period EXPONENTIAL moving average. Take note also that as stocks accelerate higher and higher, faster and faster, they are leaving even this "exponential" acceleration far behind. Despite that stocks are already valued at excessive levels from a historical perspective, investors are willing to pay even MORE for them. Is that rational behavior?
Last week, Dr. John Hussman did analysis on his website that indicated that corporate earnings are now beginning to stagnate and are likely over coming quarters to collapse back to more historically normal levels that would be about 40% below today's levels. But even still, speculators are paying even higher prices for stocks, driving valuations beyond even these historical levels. Stocks are, after all, the price an investor pays for a stream of earnings extending into the future. If an investor pays too much for them, then their YIELD on those earnings will be poor. Dr. Hussman has calculated that at earnings levels of the past few months, an investor's yield for the next ten years, based upon historical patterns, will likely be near ZERO. Here is what Dr. Hussman said today about the current bubble market:
"Regardless of last week’s slight tapering of the Federal Reserve’s policy of quantitative easing, speculators appear intent on completing the same bubble pattern that has attended a score of previous financial bubbles in equity markets, commodities, and other assets throughout history and across the globe." (emphasis mine)

Something else that is noteworthy in the above chart:
In the past, even in this overbullish market, stocks have traded between the light blue line (the exponential moving average), and the upper Bollinger Band, which represents, from a statistical perspective, TWO standard deviations outside the norm. In the past few months, stocks haven't even dropped back to the light blue line. Stocks barely made it half way back to that level. This bubble is accelerating even faster to stratospheric levels, only guaranteeing that when reality finally can no longer be denied, this house of cards will also follow historical patterns of what a popping bubble looks like.

As further evidence of how overbought this market is, note also that the last time stocks even closed below the blue line was in mid-2012 -- a year and a half ago! Stocks have barely even looked back since then! And this, despite already stratospheric price levels!

This chart following shows the acceleration of stocks during the overnight sessions in Asia and Europe.

This shows the Dow futures over the past few hours. Stocks are already 57 points higher than last Friday's close. This stock market bubble is advancing at an accelerating pace.