The Dow closed at its highest since 2007…
… “There are few times in history when the S&P 500 has been within 1% or less of its upper Bollinger band (two standard deviations above the 20-period moving average) on daily, weekly, and monthly resolutions;
coupled with a Shiller P/E in excess of 18 — the present multiple is actually 22.3;
coupled with advisory bullishness above 47% and bearishness below 27% — the actual figures are 51% and 24.5%, respectively;
with the S&P 500 at a four-year high, and more than 8% above its 52-week moving average;
and coupled, for good measure, with decelerating market internals, so that the advance-decline line at least deteriorated relative to its 13-week moving average compared with six months prior, or actually broke that average during the preceding month.
This set of conditions is observationally equivalent to a variety of other extreme syndromes of overvalued, overbought, overbullish conditions that we’ve reported over time.
Once that syndrome becomes extreme — as it has here — and you get any sort of meaningful “divergence” (rising interest rates, deteriorating internals, etc.), the result is a virtual “who’s who” of awful times to invest.
Consider the chronicle of these instances in recent decades:
August and December 1972, shortly before a bull market peak that would see the S&P 500 lose half of its value over the next two years;
August 1987, just before the market lost a third of its value over the next 20 weeks;
April and July…
Most investors were duped by the mainstream financial media into thinking that the broad US stockmarket made an important upside breakout last week, but according to our charts it did no such thing. Sure the market did breakout to new post 2008 – 2009 crash highs, but it DID NOT break out to new highs on longer-term charts, and DID NOT break out upside from the large bearish Rising Wedge that it remains stuck in.
Our 4-year chart below, which shows the uptrend from the 2009 lows in its entirety, makes plain that the market is in the late stages of a huge strongly converging, and thus strongly bearish, Rising Wedge, which results from a steady diminishing of buying power. As we can see it must soon break out from this pattern and if the breakout is to the downside it is likely to plunge, which is likely given the looming Fiscal Cliff which will ravage corporate profits – if it succeeds in breaking out upside it will buy it more time, but this is considered a much less likely outcome.
Last week, we discussed what the expectations were for Draghi’s OMT — approximately EUR250bn — which coincidentally provided cover for the rest of the year (conditionally) for the entire new issuance of the European Union.
Based on EURUSD’s recent exuberance — something we saw ahead of QE1 and QE2 — the market is now more than primed for some serious USD debasement. The current EURUSD of 1.2850 implies a Fed-to-ECB balance sheet ratio around 1.11 times.
If we assume the ECB will not have to fire its conditional bazooka (of which is priced in 100% likelihood of EUR250bn), then the Fed is expected to conjure a monetization scheme of around USD580bn — anything less would be a disappointment to the market.
However, if we assume the ECB will be doing its bond-buying monetization thing — as per the equity market’s expectations — then the Fed will need to come to the table with a bag of swag around USD850bn in order to debase the USD just enough to regain some hope.
It seems like the market has priced in…