Some Perspective on the “Can’t Lose” Market

Here are some wild stats about the current rally in the S&P 500 in 2013 which brings the gains to 17%+:

  • Of the twenty weeks this year, just four have been negative weeks.  
  • Of the four negative weeks just one has included a loss over 2%.
  • Of the four negative weeks just two of them included losses over 1%.
  • There have been zero 4%+ corrections this year.
  • The S&P 500 has gained about 0.18% on average per day year to date.
  •  The S&P 500 has traded above its 50 day moving average for 98% of the year.
  • The S&P 500 is 12.8% above its 200 day moving average.
  • The S&P 500 trades at 12.8% or higher from its 200 DMA just 8.3% of the time.
  • Said differently, the market spends 91.7% of its existence BELOW the current levels.
  • Bonus scary fear mongering unimportant corollary:  in 1987 the market shot out of the gates to a 18% gain by May 15.  It rallied another 10% before losing more than all of the annual gains in October during the crash.

There’s some perspective on how incredible this year’s move has been so far.

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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Comments

    • In 1973, still in the midst of the 1966/1982 secular bear, we made a new all time high. We corrected 50% the following 2 years. This bear market is too young to have ended in 2009, only 9 years old. History is quickly forgotten when ebullience reigns.

  1. In 1987, the Fed tightened in the spring. As the October crash approached, bonds and the dollar were in near free-falls. Small caps weren’t participating in the rally’s final phase. The number of stocks making new highs along with the indexes was tiny. None of those warning signs of an imminent top is evident in this rally. While current economic data has weakened, the Leading Economic Index has strengthened.

    The S&P500 is on a trajectory to gain 45% by the end of the year. The last time it gained over 40% in a year was 1958.

    • I graduated from college in May of 87, got my first “real” job in June, and made my first investment in the stock market (OK Cullen, “savings”) in August.

      And then I watched it collapse a few months later.

      I don’t remember being scared though. I kept up my dollar cost averaging plan, and by early the next year, I was positive again.

      I only worry about macro stuff and general trends for my 401K account, where my choices are very limited. My personal account is all about value investing.

      That being said, while the Fed didn’t tighten yet, we DID have a significant tax increase in January, and a cut in federal spending in March.

      • Thanks jaymaster for your input.
        Can you tell me where you would tell your child to rest his 401K money if he lost his job?
        TIA, Thanks In Advance..

        • The first place I put my money back in 87 was in a Vanguard mutual fund, and I would still recommend them today. I have a large amount of my savings there. Mostly in their ETFs and individual stocks of my own choosing.

          I switched a 401k to an IRA at Vanguard a couple years ago. It’s a very simple process. Just have him call them, and they’ll walk him through it.

          As to which kind of funds to invest in, well, that’s a bit tougher. I’m putting a lot in VIG lately, but I’m planning to retire in a few years, and I’m convinced dividend growth is the way to go at this stage of my life.

          I’ll be 48 on Tuesday. My goal has been to retire at 55, but 50 might be doable. Slow and steady saving still works!

  2. The market bottomed at around 670 in march 2009 and was over 1,000 within a year. Last I checked that’s over a 40% gain. Who cares about the calendar?

    The market is up over 50% in a little over a year and a half since the October 2011 bottom. We have already bubbled up!!

    The market is projected to earn 1,100 this year – say normal profit margins are 7%, and the FV PE is 15X (precisely how you would value an individual company)…FV is 1,155….we are almost 50% overvalued.

    NOBODY believes the market can decline right now. Nobody. Everyone is saying to buy the 3% dip. Not all rallies have to end with a blow off top and a poor advance decline line….there are no buyers left – everyone is all in on margin no less.

    And now that everyone is calling for a Tepper-led 87 or 99 blow off top, it is not going to happen…

    • IF we get a dip to bring in buyers, this market could really be off to the races. With worldwide QE pumping up assets, there is no telling how high is up.

  3. Trailing P/Es as of May 17 – S&P 500 19.3, Nasdaq 18.6, DJI 16.8, Russell 2000 35.7, Dow Utility 25.6. (Source: WSJ). All of them are well above a year- ago levels. At this tepid growth pace, how are we going to get to a 13, 14 or 15 forward P/E on the S&P?

      • GAAP earnings were $86.51 in 2012, and are projected to be $99 in 2013 and $104 in 2014….

        That’s 16.9X 2013 estimates, and 16.1X 2014 estimates with the SPX at 1,670….

        That’s 14.4% YOY EPS growth in 2013 and 5.1% YOY EPS growth in 2014.

        2013 revenue is projected to be $1,116 per share while 2014 revenue is projected to be $1,171 per share. That’s 3% and 4.9% YOY growth, respectively.

        The Street is projecting margins rise from 8% in 2012 to 8.9% in 2013 and remain there in 2014.

        A more realistic picture sees margins FALLING to 7%, for 2013 EPS of 78.12 and 2014 EPS of 81.97.

        So with the market at 1,670, it is trading at 20.4X 2014E EPS of 81.97.

        Were margins to revert to the historical norm of 6% on 2014 sales of 1,171, and the market trade at its rightful fair value PE of 15X forward earnings, the market would fall to 1,054 per share.

        • But let’s me more realistic and say the market is worth 15X 2014 EPS at a 7% normalized net profit margin…

          ….that’s 1,230, or -26% lower than 1,670.

          Secular bears do not end at FV, but let’s hope this time is truly different….

  4. There is little evidence that demand for stocks is waning and it is quite normal for bull,and bear, markets to display extreme behavior longer than anyone thinks possible. There is presently no evidence of euphoria. This appears to be about as close as you can get to a sure thing, but please, never think you can’t lose money.

    • That’s what I’m thinking. If things don’t start picking up soon then this talk of rising rates and ending QE is hot air. There’s a good chance that the bond bull has legs. Who woulda thunk.

      • While I’m on that subject, lets think about the relationship between S&P PE and interest rates. It is a complex relationship and hard to predict, historical relationships seldom apply since each situation is unique. So what if the current slow growth environment was percieved by the markets to possibly last a “long time”? Well the 10yr ust at 2% has a PE of 50. It could go lower. A PE of 16 or 17 on the S&P doesn’t seem high to me. And it would appear that 4% won’t be here for a while.

        • Mr Schofield, your contribution to fiscal world of US denominated dollar mkts is MUCH appreciated.
          People like you sir who are always out there looking, reading, researching AND most importantly SHARING your opinions and thoughts are most graciously appreciated.

          Cullen (God Bless Him) can plant the seed of Prag cap. However It is up to the mainstream populace of profit seeking investors like you and I AND others here to not only spread the “Monetary MSG”
          BUT to grow ou portfolio as well.

          SO I Salute You Sir of the house of Schofield, You are a contributor to the learners.

          • Thank you Cowpoke, good to know my ramblings are useful. It is a small contribution compared to what I have learned here. I couldn’t have done it without Cullen and the other contributors, and I can’t help but feel obligated to return something.

          • Spreading “Monetary MSG” is NOT a good idea!

            MSG was developed to cause lab rats to develop diabetes. It is “Fat Fertilizer on Steroids.”

            Today MSG is found in copious quantities in nearly all processed foods – usually under different and innocent sounding names. The current epidemic of obesity is the result.

            Do you really want to see the same cascade of results in our financial world?

        • What about Japan? Their 10y is below 1%. Their interest rates have been low for decades, and the long term effect has been to slowly destroy profitability and drag stocks down over 20+ years. Our profit margins have held up, but we haven’t had low interest rates for 2 decades yet. Of course, Japan is off to the races this year with its new super stimulus.

  5. I am a huge bear and threw in the towel last Wednesday. We are barely moving at 2% growth, Europe’s youth unemployment is on the brink of disaster and China’s trade numbers are conjured out of thin air to mask all the yuan problems… but I no longer care because the market does not care. I give up. The party is about at the 1am mark and has a good two hours to go, so why try to be rational anymore? I’m not. I’m bellying up to the bar, ordering some SPY and praying.

      • Watch to see if it falls 10% and get out to the lowered bonds. Wait, then get back in when it shows its going up again. It worked last time, maybe it will again.

  6. My parents both retired two weeks ago with a significant nest egg and have moved 100% of their retirement to cash. There is simply too much risk in both the bond and equity markets now. I don’t think inflation becomes a real issue for another 4 or 5 years. There will be an opportunity to get back into the pool but it’s no where near a CAPE of 25.

  7. US stock markets are in hyperinflation mode, per the IASB definition of 25%+ gain per year for over 3 years.

    • I have to disagree bart. It’s actually in a deflationary mode!

      I’m only partially being a smartass here. The theory of relativity actually matters here!

      If we consider one unit of SPY as our measure of value, and compare it relative to the dollar, then today we can “buy” about 170 dollars with one unit today, versus 130 dollars a year ago.

      So we’re actuality getting more dollars per unit now than we did a year ago. That’s deflation!

      Where the rubber hits the road is when we convert the dollar units into actual goods. If we can buy more food, or oil, or PC’s or whatever, with one SPY share, even after converting it to dollars first, then the SPY market is in a deflationary mode.

      But if the SPY falls in per unit value, then THAT is inflation. In other words if one unit of Spy could “buy” you 170 dollars today, but it falls back to year-ago levels, then you could only “buy” 130 dollars. It all depends on your frame of reference.

      And as I said, I’m only being slightly facetious with this. Depending on your frame of reference, it can be totally true. Goldbugs play this game all the time when they value stuff in units of weight of gold. You shift the frame of reference and create an alternate reality. Up is down and down is up, because words mean what we say they mean.

  8. There’s a huge difference with 1987: there was a 10%ish correction in April-May 1987, something that seems almost unthinkable today, from there the market rallyed another 20% before crashing.

  9. Hussman:

    “The Pavlovian response of investors to monetary easing – as if it has anything more than a transitory and indirect effect on the economy – fails to distinguish between liquidity and solvency; between economic activity and market speculation; and between investment value and artificially depressed risk premiums. The economy is not gaining anything durable from these policies”