About Me

Retired chief investment officer and former NYSE firm partner with 40 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 !!!

Sunday, December 28, 2014

SPX -- Weekly

The Three Year Weekly Chart....
Since late 2011, the SPX has advanced relatively steadily in a low to high channel of 13%, and
has kept on a 20% average annual growth track. This performance has been reminiscent of the
spectacular 1995 - 1999 bubble run up although the current advance has been on a far more
moderate trajectory. If the SPX could sustain this strong pace through 2015, it would bring the
average up to 2500, a level well above what a very broadly positive consensus is forecasting.
Such an advance would bring the p/e ratio for the SPX to 20x, nearly double the level of
2011. There is non-bubble empirical support for another big year in that when inflation and
interest rates were low in the 1960 - 65 period during a period of stronger economic expansion,
the market did trade up toward the 20x level. Growth is not as rapid now, but interest rates and
the inflation rate are exceedingly low. SPX Weekly Chart

I think the major key behind the strong market advance in recent years has been the Fed's QE
programs both in prospect and in actuality. These programs have greatly boosted investor
confidence and have sustained a psychology of buying price dips, with all episodes seeing the
SPX go on to new highs. Note carefully on the chart though that price momentum has been
fading during 2014, in keeping I think with the progressive phase out of the large QE program.
Not only that, but players have become more defensive in stock selection and have stayed cool
on smaller cap, more traditionally volatile issues. With QE over since the early autumn, the SPX
has been trading more toward low end of the trend range in recent months.

Now, I do not pretend to have special insight on how well the market will perform in 2015.
Monetary liquidity growth is going to continue to decelerate through the year and excess
growth of liquidity relative to the needs of the real economy will likely continue to fade.
If the USD - Japan Yen relationship remains strong in favor of the dollar, there may be a
positive liquidity partial offset in the form of an expanding carry trade. As well, it might
come to pass that there will be a significant rotation out of bonds into stocks if the Fed opts
to push short rates up by 50 basis points or so as a further tightening trial.

I think players have bought the idea that some growth with low inflation and interest rates
gives them carte blanche to see how far they can push up the multiple. There is a large
degree of intoxication there. However, I also think the guys know they are playing with
fire in the game of extending the p/e multiple further. Just witness the fast, herd instinct
whipsaw action we have seen in recent months.

We can speculate happily on the potential for market return in the year ahead, but be sure to
recognize that  market risk has become sharply elevated as the US transitions more fully
away from powerful liquidity support at a time when investor confidence and enthusiasm are
running high.
I have linked to a chart of the SPX which compares it to a 200 day m/a oscillator in green.
The chart shows a gradual deterioration of price momentum going back to the middle of
2013. This gradual downtrend in momentum is a bit unusual, but if it extends well into next
year, it would put the SPX on a more modest course relative to the 2011 - 2014 uptrend.

SPX vs. SPX relative to the 200 day m/a

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