Sunday, October 6, 2013

Long Term Stock Chart: The Parabolic Blast Is Back For The Grand Finale

Taking a long term view of the U.S. stock market we can see that for the third time in the last 15 years the market has blasted off in a parabolic burst of euphoria.

The question facing the market today is whether this is the beginning of a new secular bull market or whether we face one more correction before the secular bear market has ended. Readers know that I am in the second camp, and I believe that the further stocks move higher (without the earnings to justify that move) the more dangerous they become. 

The following shows the updated Shiller P/E chart, reminding us that based on a price to earnings ratio the stock market is currently at the point where previous bull markets have peaked. The highlighted section shows the madness of the 2000 bubble, which stock market bulls are counting on to repeat. We are back at the levels seen in late 2007 (the previous peak), when we were told that stocks were cheap.

One of the factors keeping stocks moving higher has been confidence that higher stock prices will lead to a greater wealth effect which will in turn lead to greater economic growth. If that sounds ridiculous it is because it is. As seen below, economic confidence has taken a sharp turn downward. 

This leaves only one engine in place to try and artificially move asset prices higher; the growth of the Federal Reserve's balance sheet through asset purchases. 

Secular stock markets tend to last on average for 17.6 years (the current secular bear market began in March of 2000) and end with the PE ratio under 10x. They end with everyone on the planet selling and shorting stocks. This was the environment in 1982, at a real stock market bottom. Did we reach that point in 2009? Based on a price to earnings metric stocks were just under fair valuation, far from the lows put in at previous secular bottoms.

Perhaps this time is different. Perhaps for the first time in history a central bank will have the ability to create true wealth in a country with a printing press. Every other time in history it has only caused greater pain (see 2000 and 2008 in America).

My money is bet against the Fed as I wait on the sidelines. I would rather purchase assets that everyone in the world hates, such as agriculture, than chase momentum in the one asset class on the planet that everyone considers a sure thing.

h/t Zero Hedge, OfTwoMinds