Stretched to the Limit
There are good reasons to suspect that the bull market in US equities has been stretched to the limit. These include inter alia: high fundamental valuation levels, as e.g. illustrated by the Shiller P/E ratio (a.k.a. “CAPE”/ cyclically adjusted P/E); rising interest rates; and the maturity of the advance.
The end of an era – a little review of the mother of modern crash patterns, the 1929 debacle. In hindsight it is both a bit scary and sad, in light of the important caesura it represented. In many ways the roaring 20s were the last hurrah of a world in its death throes, a world that never managed to make a comeback. The massive expansion of the State that had begun in the years just before WW1 resumed in full force as soon as the post-war party on Wall Street ended. The worried crowd that formed in the streets around the NYSE in the week of the crash may well have suspected that the starting gun to profound change had just been fired. [PT]
Near the end of a bull market cycle there is always the question of when a decline will begin, and above all, how large will it be. I believe it possible that the retreat in prices will begin soon and that it could possibly even start out with a crash. I will explain in the following what led me to draw this conclusion.
2015 – 2018: the S&P 500 Index Moves Up Along a Well-Defined Trend Line
Let us first look at a chart of the S&P 500 Index over the past three years including the major trend line formed by its rally. Prices moved up steadily along this trend line for a long time, until the advance suddenly began to steepen significantly in January of 2018. Thereafter prices plunged very rapidly in early February, followed by a swift rebound. This rebound appears to have ended earlier last week.
S&P from 2015 to 2018 with trend line providing support: for now the trend line still holds.
In 1987 the Market Crashes after Breaking Through a Similar Trend Line
Let us now compare the developments of recent years to a chart showing the move in the DJIA from 1986 to 1987 (focus on the general shape of the move rather than details such as percentage gains and duration). The similarities between the patterns are quite stunning.
DJIA with trend line, 1986 – 1987. After breaking through the trend line, the index quickly plummeted.
In 1986/87 prices also moved up along a rising trend line; there was a similar acceleration of the rally into the peak, followed by an initial test of the trend line and a rebound. After a short while the trend line was tested a second time. When it failed to hold, the crash commenced, soon culminating in a loss of almost 23% in a single trading day on October 19 1987.
Whiplash… the bull market mascot …read more
Source:: Acting Man
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