The forward looking economic indicators remain both sluggish and range bound and do not
signal an acceleration of sales and profits growth. Such has been the case since early in
the year. The QE program from the Fed has been surging along and this has been the prime
underwriter of the strong advance for US stocks this year. The p/e ratio on 12 months net
per share is approaching 17X, thus just lifting stocks up from value to the start of a more
speculative phase. The current bull now represents the third liquidity driven speculative
advance since the mid - 1990s. The excess liquidity which is fueling this advance is not
credit driven as have been most prior heavily momentum driven runs which have been
eventually negated by rising short term rates and credit tightening. The current run has
been fired up by a combination of exceptionally strong money liquidity growth coupled
with both low output growth and inflation thus allowing surplus liquidity to flow into
stocks. The 1935 - 36 period when stocks soared on QE is the closest analog.
Like the 1930s, the curbing and / or shut down of QE would represent a powerful
tightening of monetary policy and leave both the economy and the market vulnerable
unless we see private sector credit demand return to more normal levels.
The weekly chart is now showing a positive whipsaw which has lifted my intermediate
term indicators from negative up to neutral. The sell signal generated a short time back has
been swept away by easy money policies continuation reassurances from none other than
BB of the Fed himself. The market remains overbought for the six month window and is
now getting overbought on a very long term basis as well as the SPX is once again at the top
of its post WW 2 channel. It can blow through the channel top and money can still be made,
but the risk of eventual large losses heads progressively skyward. (The SPX has only gone
above its channel top twice since 1945 -- It happened 1995 - 2002 and 2003 - 07).
SPX Weekly Chart
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!