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Symmetry and the $SPX: Are We Headed to 1808.34 With A Bullet Or Are We Headed For A Train Wreck (Or Both)?

Yes, ladies and gentlemen, I am still here.

“I’M NEVER GIVIN UP WHILE I’M STILL BREATHIN! “, to quote a line from one of my favorite Lynyrd Skynyrd songs. I have yet to totally give up on the concept of a blog or a newsletter down the road, but I am working on a couple of projects, one of which is an automated trading model for forex pairs (and it is still be tweaked as we speak).

For now, I am just going to throw down a very few choice words about where we are in the rather rapid progression of the rally in the $SPX. Last week be completely blew apart a monthly close limit of 1654.19. We are now within 7 points of blowing out the all-time $SPX high of 1687.18 at the time of this writing. That sets up two targets, one an extension from the “Tepper” lows of 2011 (1074.77 in October 2011 and the cyclical highs of 9/11/2012) Having surpassed the 1586 level (the 127.2% extension of those cyclical highs, the 161.8% extension would be 1724.42. If one uses the March 2009 lows and measures to the May 2011 highs, the 1.61.8% extension of that line would give you a target of 1808.34. I did not pull up the “air traffic control screens” this time, but we would also be seeing some convergence from the 2003 market lows to 2007 highs at around the 1797 area, which is the 127.2% extension of that pair of lows and highs, as well.

As you can see from the marked-up monthly chart, there is AB=CD symmetry between those last two legs. We see that common symmetry so frequently, that one might think that it is a fait accompli that we will see that 1808.34 target. At the moment, there is nothing that says we won’t, particularly since we finished the week at the high of the week.  If we can take out the 1687 high, the odds are greater than a coin toss that we will.

Instead of beating the valuation horse to death again, read this very good explanation of the current situation based on the longer term (I mean decades long) perspective. I do not endorse Doug Short in any way, he is simply summarizing ground I have covered in the past. If you have a long only portfolio, you should realize that on a historical basis, the market is not incredibly cheap at the moment, and if the rally continues unabated, we could see a similar kind of valuation track that we got into in the very late 1990s. I had the same concerns in 1999 that I have now, which lead me to leave the market before it got crushed in 2000-2003. Anyone nearing retirement should have option strategies or exit strategies in place to protect one’s asset from a repricing that could come from any number of directions (many of which I have discussed in previous posts).

We have already heard some caution regarding the US economy from UPS (though, UPS has its own labor problems which added to the poor performance). The tail of the tape says that if we do see a slowdown, the Fed may continue to print money to prop the economy (and the markets, as a result of the limited alternatives for return on cash), but a little redneck math says that (1808.34/1680.19) X 24.57 = 26.44. If one believes the concept of using the regression line as shown in the article from the previous paragraph, one can see we will be crawling up into the middle of 5th quartile of inflation-adjusted price earnings ratios.

Anyone who understands the longer-term history of market action would at least have a back-up plan in place should another major correction be in the works.

Fibonacci pattern symmetry is favoring the bulls at the moment. Just make sure you have your ducks in a row if you are near retirement and need to take profits to protect your nest egg.

Once again, thanks for supporting this blog!

 

 

{ 2 comments… add one }

  • Victor Berry December 2, 2013, 11:48 am

    Hi David,

    I’m impressed with your prediction of the 1808.34 SPX target which was just hit recently. So, what happens now? Can the SPX go any higher from here in a blow-off top scenario or do you expect a major sell-off?

    I wish you had the time to post stock market analysis more often.

  • admin December 19, 2013, 2:28 pm

    Victor:

    Thanks for your kind remarks and for leaving a question. I am going to try to find time between doing end of year tax items and all the other stuff I do and try to answer the question regarding what happens next. I usually do some kind of beginning of the year sort of post to cover it. I am in the midst of polishing off some automated models and helping start another little business venture.

    At any rate, I think as we move forward, the market can continue to rise based on the flows of earnings, but as we move forward, I think at some point earnings will falter because of cyclical economic pressures, a loss of consumer activity and confidence as the new healthcare law gets fully implemented, and valuations become increasingly extended. I try to look at those issues from longer term historic proportions than just trying to look at investor sentiment and other indicators. I have not yet fully calculated what a final top may look like, but I will try to do so in the coming few days.

    We have seen the kind of valuation rally from 2009 to present that would equal about 2/3 of the entire rally from 1982 to 2000. What warps the situation so badly is that zero interest rates has killed the entire art of saving and balanced investing, and the U.S. Federal Reserve has continued to build slowly growing asset bubbles, simply because of the damage done to our economy over the last decade or so. It has to end, and I think end badly the longer the tapering is allowed. China and Asian countries continue to grow and take the lion’s share of commodity assets (including gold), and we continue to press the market higher as corporate earnings begin to fade and housing inventory begins to build again. At some point, rational interest rates will have to return, or they will be forced upon us by the mountain of debt that we have.

    As long as the zero interest rate party is on, however, you will continue to see the markets stay at high levels as the Federal Reserve now takes on the role of keeping equity values elevated. That simply cannot last forever. It is no different now than it was near any market top. The foundation will have to crumble before people figure out the house is falling. The only question left is how much more elevated valuations can get, and when the correction begins. I will try to comment on that soon.

    I hope you have a wonderful Christmas and a Happy 2014! Sorry for the delay in my response.

    David B.

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